Russell Roberts's Blog, page 1411

How Markets Use Knowledge

If you are teaching Microeconomics or Principles this semester, please feel free to share this visual essay of mine with your students. It is my attempt to convey the lesson of Hayek's Use of Knowledge in Society using supply and demand.

New Adventures in Treating Symptoms

Here's a letter to the Boston Globe:

David D'Alessandro argues that America's economy would be strengthened if government forced suppliers to hire more workers to produce the goods and services that these firms sell to Uncle Sam ("Make 'em hire," Sept. 20).

That is, Mr. D'Alessandro wants to oblige certain firms to operate with inefficiently large numbers of workers.

If it's true that the path to economic efficiency is paved with mandated inefficiencies, government should go beyond Mr. D'Alessandro's relatively modest proposal.  It should require also that, say, restaurants assign a minimum of three waiters to each table.  That every taxicab be driven at each point in time by two drivers (one steers while the other operates the foot peddles).  That barbershops designate two barbers to perform each haircut.  That schools man each classroom during every minute of the school day with two teachers.  And that newspapers publish only columns and op-eds written by at least two writers.

Given that profit-seeking producers greedily seek to operate as efficiently as possible, available opportunities to encourage economic recovery by prohibiting such efficiencies are legion!

Sincerely,

Donald J. Boudreaux

My challenge to Tyler

There is a new theory from Noah Smith, for the alleged stagnation of America's standard of living, the Great Relocation (HT: Tyler).

The idea, in a nutshell, is that economic activity is relocating from rich Europe, America, and Asia to developing Asia faster than technological progress can replenish it.

This makes no more sense to me than Tyler's Great Stagnation story–but I will save that for another time. For this post, I want to focus on Tyler's reaction to Smith's story. His first point is this one:

1. Median income begins to stagnate in 1973, before this trend is significantly underway.

You hear this claim about median income all the time (and you are going to hear a lot more between now and November 2012) and I do not understand it. What is it supposed to mean? Does it mean that the person who was the median or family in 1973 continued onward at a constant standard of living without any gains despite enormous gains in per capita income? This is the way the story is usually told–the rich (as if they were a fixed group of individuals, an exclusive club) somehow managed to gain all of the gains of the intervening 38 years for themselves. This is clearly not true. If you look at any data that follows the same people over time, you will see that their lives improve as they get older and that they are typically better off than their parents. Better off in absolute terms, not relative ones. Some people move up relative to others. Some move down. But the entire distribution moves up.

Or does it mean that the typical family or individual in America today has the same standard of living as people back in 1973? Is the median a surrogate for the middle class? This is a different claim from the first one. The problem with this claim is the types of people in the middle in 1973 are different from the types of people now. There was a major demographic change in the 1970′s. The divorce rate exploded. Suddenly (and it was pretty suddenly) new households were created as couples divorced. The rate of household creation grew faster than population.

The effect of this increase in the divorce rate was to change who was at the median. A lot of below-median families were created in the 1970′s headed by recently divorced single women who suddenly found themselves wanting to be in workforce. They had not prepared for this. Their skills were different. Adding those families pulls the measured median down. That fall in the median does not mean that the family that was at the median was now worse off. It's like the median height falling at the party when the Celtics leave. Nobody in the room gets any shorter. Similarly, in the individual data, people who weren't working (their wages were zero but non-workers earning zero aren't included in the measured median) were working unexpectedly. They were typically people with below-average wages. The measured median fell.

This of course created a lot of economic hardship. The surge in divorce rates made a lot of people poor. But you don't want to conclude that the American economic system is broken because of an increase in the divorce rate. Most people, and I think this includes Tyler, don't view the stagnation of wages or incomes as the result of a social change but as the result of a change in how the system treats someone today relative to yesterday. When you keep repeating that median income is stagnant, you usually mean that people are stuck or are not getting ahead.

The same phenomenon occurs when there is an increase in immigration by low-skilled workers. That reduces the median wage. That statistical change doesn't make anyone worse off in and of itself.

I will also mention, as I have before, that the standard measures of median income understate growth because they overstate inflation and understate compensation–they leave out many forms of compensation that have grown more important since 1973.

Here has what has truly changed in the fabric of the American workforce since 1973. Before 1973 you could graduate not finish high school and live pretty well. You could work in a factory or do a number of things that paid well in the relative sense–you could be somewhere near the middle.

That isn't true any more. Not finishing high school is very bad for your probably place in the income distribution. And such a person may actually have a lower standard of living in absolute terms relative to 1973. Factory jobs are disappearing. Yes, some are part of the Great Relocation. But many or maybe even most are part of the great increases in productivity that have occurred since 1973. America manufactures more stuff since then with fewer people. There is no evidence there of a great stagnation but rather the opposite.

The difficult financial life of a high school dropout and even many high school graduates who do not go on to a college is a symptom not a cause of economic change. It is the symptom of a more productive economy based on knowledge and information. It's an unpleasant symptom but the underlying cause is a good thing. The way to deal with the symptom is to improve the education system.

So my challenge to Tyler is to tell me what he thinks the stagnation in median income signifies. Has there been a change in the returns to education or creativity? Or is it mostly a statistical artifact? Whichever answer he gives, I would like to see him reconcile it with the panel data–the surveys of economic information that follow the same people over time. Others are of course welcome to chime in as well. If Tyler responds I will link to either his post or his email if he wishes.

Quotation of the Day…

… is from page 101 of Frank Knight's exhaustive 1937 review, in the Canadian Journal of Economics and Political Science, of Keynes's General Theory:

[M]any of Mr. Keynes's own doctrines are, as he would proudly admit, among the notorious fallacies to combat which has been considered a main function of the teaching of economics.

Birthday thoughts

I turned 57 today. And for a reason that will be clear below, I thought I'd write something personal to commemorate the date.

I usually lose weight in the summer. I exercise more and I eat better. Then comes the fall and I put most of it back on. And then a little bit more. Not a good trend. There are some ups and downs. I'll eat salads for a few days or limit my desert intake for a while. But the trend is unmistakeable. It's hard to know exactly where I might end up, but "bigger" is a good guess. I'm not grotesquely overweight. Just a bit heavy around the middle as I notice some men are of my age. I am just thin enough to pretend that I am "normal." But that doesn't really matter and the trend isn't good.

This year, I lost about 10 pounds over the summer and within a few weeks, I put them back on. So for the first time in my life, I decided to start going to the gym. I once was a serious runner but that was 30 years ago. I've tried walking but there's something about DC weather that has stopped my recent attempts to get more active outside. So off to the gym. I thought two or three trips a week would make a difference. And being more fit is a big plus. I'd enjoy those summer hikes even more if I were in better shape.

Then a friend sent me a book–Younger Next Year–saying it would change my life. It has a bit of Art Devany to it–there's an air of science about it because it claims to based on our evolutionary past. It's written in a breathless tone that occasionally sickens me in a book like this but it also had a certain charm. For some reason it got to me. The main theme is that once your turn 50 or so, your body starts to decay and decay quickly but that serious exercise and strength training can slow down the trend dramatically. The authors advocate 6 days a week at the gym. SIX DAYS! They say it's like a job. You show up and do your job. They have various ideas about what kind of exercise but the main point is 45 minutes of cardio, and two of the six days should involve lifting weights.

SIX DAYS! It seemed ridiculous. And it's really not me. Exercise as a passion has never appealed to me. But I tried it. And I like it. I've done it for almost three weeks now. Read a few other books to figure out what to do (including some tricks from Art Devany).

I ride a stationary bike for four days and lift weights for other two. I've never lifted weights before. I'm frightfully weak. But I actually enjoy it.

I'm back to my end-of-summer weight simply by exercising more and cutting out junk from my diet (one of their other pieces of advice.) I've also reduced portion size a bit and I find myself not missing the food I once ate. I have more energy. I feel great.

Can I keep it up? Will I want to? This post is my way of encouraging myself. I'd like to write again a year from now and be able to say I stayed on the path. It will be awkward to admit failure. So this post is my way of tying myself to the mast. The bonds are loose. But it's a start.

Review of Doug Irwin's Peddling Protectionism

Here's my hot-off-the-press review, in the Independent Review, of Doug Irwin's superb new book Peddling Protectionism: Smoot-Hawley and the Great Depression.

Some Links

Arnold Kling explains that "applying macroeconomic models to questions of fiscal policy is the equivalent of using pre-Copernican astronomy to launch a satellite."  Yep.  A model's Rococo complexity ought not be mistaken for that model's usefulness.

Also in The American, Steve Conover explains that "In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller."

Steve Landsburg offers his thoughts on the assertion that people lack compassion if they oppose using government to force A to care for B.

In this short video, produced by the Mercatus Center's Rob Raffety, some GMU folk celebrate Bastiat.  And this follow-up.

Wall Street Journal columnist Mary Anastasia O'Grady explains how American labor unions greedily pose as friends of foreigners.

Did the stimulus money hire the unemployed?

This week's EconTalk is Garett Jones talking about his recent survey work looking at who was hired by firms who received stimulus money. Was it the unemployed? The already employed? It is the beginning of an answer to some of the questions I raised in this post.

Quotation of the Day…

… is from page 258 of Tom Bethell's excellent 1998 book The Noblest Triumph:

Property is a system of punishments, in additions to rewards.

Of course, under crony capitalism with its bailouts and subsidies, property of this sort is compromised.  And being so compromised, property no longer serves one of its most useful functions: directing the use of scarce resources onto socially beneficial – and off of socially harmful – avenues.

Does the presidential election of 2012 matter?

My claim in this editorial in the Boston Globe is that who wins the presidential election matters a lot less than you think (if you're a partisan).