Russell Roberts's Blog, page 1420
August 31, 2011
Some Links
The Manhattan Institute's Heather Mac Donald exposes a journalist's questionable premises.
The Fraser Institute's Mark Milke shares sensible thoughts on the unsustainability of the welfare state; here are some key 'grafs:
For the record, the fault for the ramped-up public debt cannot be placed on "too low" taxes. A variety of countries with widely differing tax levels all continued to borrow massively over that period.
For example, since 1995, and as a percentage of its economy, Greece's total tax take has been about one-eighth to one-fifth higher than the United States (depending on the year). But high-tax Greece put itself into more debt as did the (relatively) low-tax U.S. Or consider the UK; its tax rates rose steadily since 1995 but so too its red ink problem.
In other words, the assumption that higher tax revenues will save a country from its spending and borrowing addiction is mistaken. That's not any more likely than a modest raise for a consumer maxed out on her credit cards whose real problem is overspending.
Jonah Goldberg sensibly warns against the Cult of Expertise.
Here's the Washington Examiner's David Freddoso on the lunacy of government-promoted "green jobs." (HT Adam Bitely)
Richard Rahn riffs on Vito Tanzi's new book – a book that I knew nothing of until now, but have just put on my reading list.
Finally, speaking of books that I want to read, Nick Schulz reviews, in today's Wall Street Journal, Sonia Arrison's 100+.
Quotation of the Day…
… is from page 99 of historian William Manchester's 1992 book A World Lit Only by Fire; here, Manchester is writing about 16th-century Europe:
[T]he sons of merchants led the way in learning foreign languages. They were already among the most attentive pupils. The growth of industry gave education a new urgency. Literacy had been an expensive indulgence in an agrarian culture, but in an urban, merchant world it was mandatory.
August 30, 2011
The Microeconomics of the Broken Window Fallacy
The Keynesian defense of breaking windows or the economic virtues of hurricanes would go something like this:
Yes, breaking windows is destructive. Yes, it reduces wealth. But when there are large amounts of unemployed resources, say in the glass business, then breaking windows is close to a free lunch. In a world of unemployed glaziers, breaking windows can jump-start the economy by putting the unemployed back to work. They will spend the money they receive for repairing the broken windows.
When confronted with the claim by those of us who like Bastiat, that the money to repair the windows will now be unavailable to spend on something else, the Keynesian responds like this:
But people are sitting on money that is doing nothing. The insurance company that will now pay back the homeowner whose house was damaged by the hurricane was sitting on piles of cash. That cash was sitting in the bank where the bank has excess reserves not being lent out, not being invested. So yes, breaking windows can improve the incomes of glaziers and start a process of recovery.
What do we respond, those of us who are enamored with Bastiat and who think he's right?
I would re-state the Bastiat story and tell it a little differently than it is usually told. The usual point is that the money has to come from somewhere–we see the repaired window but ignore the things that don't get built or bought. But I think a better way to tell the story is to point out that the RESOURCES have to come from somewhere. The hurricane increases the demand for glaziers and that is good for glaziers. But that is good for all glaziers, employed and unemployed. It pushes up the price of glass repair. That discourages some folks from having glass work done who otherwise would have done it. So there is some offset of the hurricane's impact on glazier employment. And as the Hayek character says in "Fight of the Century":
You see slack in some sectors as a "general glut"
But some sectors are healthy, only some in a rut
So spending's not free – that's the heart of the matter
Too much is wasted as cronies get fatter.
So while glaziers (and carpenters) may be unemployed, other sectors (such as the wood market) may not be having such problems. The hurricane has a big impact on the price of wood, discouraging a bunch of would-be demanders of wood from buying as much as they did before. Again, there's an offset. The point is that "aggregate demand" doesn't tell the whole story.
But the real problem with breaking windows is that it's not productive. I know. That's obvious. But think about what the words mean. Right now, there are a lot of unemployed construction workers. What does a hurricane do? A hurricane IS good for carpenters and glaziers and roofers. But it's unproductive work. It gets the home owner back to the status quo. It doesn't create anything new or valuable. I'm not saying the production is wasted. I'm saying it's a repair. Why is that important?
Imagine a world where there hasn't been a hurricane and I want to help the unemployed carpenter. Here are two ways to do so. One is to burn my house down and then call the carpenter and give him $100,000 to rebuild my house. Here is the second way. I call the carpenter and say, I feel bad that politicians artificially increased the demand for housing at the end of the 20th century, pulling you into an industry that cannot be sustained at its current leve. I feel bad that you've been unemployed for three years. So I'm going to give you $100,000.
Which of those two policies would have the bigger stimulative effect? The charity should have a bigger effect. No offsets from pushing up the price of lumber and so on. But giving people money doesn't change the underlying problem that there are more carpenters than work available for them. Creating temporary work either by burning down houses deliberatively or accidentally through a hurricane doesn't change the fact that there are too many carpenters and glaziers relative to demand.
So the hurricane will put carpenters back to work. But it would be even better if there had been no hurricane and people had just given them a check. Charity is more productive than destroying stuff and paying people to get back to square one.
But the charity approach is what we've been doing for the last few years. It's called unemployment insurance. I know, it's supposed to be stimulative but there's no sign that it is. Why would it be? It doesn't solve the problem that there are too many carpenters.
This is related what Arnold Kling calls "Patterns of Sustainable Specialization and Trade." Repairing houses damaged by a hurricane isn't sustainable. And if I just give carpenters money because I feel sorry for them, that isn't trade. That's charity. Both have the same stimulative effect–very little, because they don't get at the underlying problem. Prosperity is the way we specialize and serve each other, creating products and services that we each value. Destruction cannot be the source of prosperity.
Teachers
The latest EconTalk is a back-to-school special–Eric Hanushek talking about the importance of teachers. Very provocative. Education would be much more effective in the full sense of the word if we let competition transform it.
Magic
Human creativity keeps expanding. Beautiful.
Finding ways to raise costs and make us poorer
Susan Hockfield has a piece in the New York Times on manufacturing. She is probably a very smart person. She is described as a neuroscientist, president of MIT, and a member of the GE board. Here is how her piece opens:
The United States became the world's largest economy because we invented products and then made them with new processes. With design and fabrication side by side, insights from the factory floor flowed back to the drawing board. Today, our most important task is to restart this virtuous cycle of invention and manufacturing.
Rebuilding our manufacturing capacity requires the demolition of the idea that the United States can thrive on its service sector alone. We need to create at least 20 million jobs in the next decade to offset the effects of the recession and to address our $500 billion trade deficit in manufactured goods. These problems are related, given that the service sector accounts for only 20 percent of world trade.
The piece goes on to talk about why we need government to get involved. But let's just look at the opening. I disagree with almost every sentence. But the most important error is the idea implicit in this piece that there was a decision made somewhere by someone to gamble on a service economy instead of a manufacturing economy. If the idea of returning to what allegedly made America great is such a good idea, why does she need to write a piece in the New York Times? If making the stuff we invent is so virtuous, why isn't it happening? There are four possibilities.
1. No one has thought of it.
2. People have thought of it but something stops them from implementing the idea.
3. People have thought of it but the gains go to others so no one does it.
4. It's not a good idea.
So why does Apple, for example, outsource so much of its production? Because it's cheaper and it allows more people to be able to afford more Apple products.
Making stuff the cheapest way is the road to prosperity.
Trying to find expensive ways to make stuff (because it once was a good idea but no longer is) is the road to poverty.
Quotation of the Day…
… is from page 21 of Hayek's The Trend of Economic Thinking (Vol. 3 of Hayek's Collected Works); the quotation comes from the 1933 essay after which this volume is named; in the following passage Hayek is discussing the negative reaction by many people in the 19th century to economics:
The attack on economics sprang rather from a dislike of the application of scientific methods to the investigation of social problems. The existence of a body of reasoning which prevented people from following their first impulsive reactions, and which compelled them to balance indirect effects, which could be seen only by exercising the intellect, against intense feeling caused by the direct observation of concrete suffering, then as now, occasioned intense resentment.
No small part of Keynes's (and the Keynesians's) success is due, I believe, to their dressing up in scientific jargon and garb what are, at bottom, little more than ad hoc excuses for people to follow "their first impulsive reactions." Keynesians's pose as scientists – their substitution of scientism for science – masks their rejection of a genuinely scientific approach to the study of the economy.
August 29, 2011
Open Letter to Peter Morici
Prof. Peter Morici
University of Maryland
Smith School of Business
College Park, MD
Dear Peter:
In your guest blog-post yesterday at CNBC you argue that the destruction caused by hurricane Irene will spark a "process of economic renewal [that] can leave communities better off than before" ("Economic Impact of Hurricane Irene"). Central to your argument is your claim that, because of the rebuilding, "the capital stock that emerges will prove more economically useful and productive."
In other words, whenever assets still in use are destroyed, wealth will thereby be created – that is, people whose assets are destroyed will be made richer – because these destroyed assets are replaced with ones that are newer and more productive.
I hereby offer my services to you, at a modest wage, to destroy your house and your car. Act now, and I'll throw in at no extra charge destruction of all of your clothing, furniture, computer hardware and software, and large and small household appliances.
Because, I'm sure, almost all of these things that I'll destroy for you are more than a few days old (and, hence, are hampered by wear and tear), you'll be obliged to replace them with newer versions that are "more economically useful and productive." You will, by your own logic, be made richer.
Just send me a note with some times that are good for you for me to come by with sledge hammers and blowtorches. Given the short distance between Fairfax and College Park, I can be at your place pronto.
Oh, as an extra bonus, I promise not to clean up the mess! That way, there'll be more jobs created for clean-up crews in your neighborhood.
Sincerely,
Donald J. Boudreaux
August 28, 2011
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