Russell Roberts's Blog, page 1431

Duplicity of the Day…

… is from influential South African politician Julius Malema who boasts

One of the things I've learnt in my short life in politics is the ability to live in the conditions of capitalism while fighting it and defeating it.

UPDATE (for context from the above-linked news report):

Malema had called a media briefing to respond to a Sunday Independent report at the weekend that he was building himself a R16m [2.3 million U.S. dollars] house in the posh Johannesburg Sandown suburb.

(HT John Vink)

Consumers Harmed by Free Trade?

Here's a letter to the Allentown, PA, Morning Call:

Praising Sen. Bob Casey's opposition to freer trade, Nancy Tate regurgitates in one letter the entire smorgasbord of noxious protectionist gruel swallowed today by many "Progressives" (Letters, July 19).  Among Ms. Tate's projectiles, for example, is her assertion that free trade is "an assault" on "consumer rights."

How, exactly, are consumers' rights assaulted by a policy that gives them greater freedom to spend their money as they choose?  In what ways are consumers harmed when the range, variety, and quality of goods and services available to them expand while the prices of those goods and services fall?

As trade scholar Dan Griswold wrote in his book Mad About Trade, "If one of our children grows up to invent a way to move goods and bits of information even more rapidly around the world, we rightly call that 'progress'; if another child grows up to become a populist politician who advocates raising trade barriers to slow the movement of those same goods and data across borders, we perversely call that 'progressive.'"*

Perverse indeed.

Sincerely,
Donald J. Boudreaux
Professor of Economics

* Daniel Griswold, Mad About Trade (Washington, DC: Cato Institute, 2009), p. 172.

McCelery

Here's a letter to an angry e-mail correspondent:

Dear Mr. E__________:

I normally ignore people who describe me (as you so charmingly do) as "a sh**eating lackey for the Koch brothers."  But the confused thinking running throughout your e-mail is so interesting that I'll break my rule.

You wonder how I can "sleep nights carrying water for Corporate America."  Why do I not, you ask, spend my energies "for example exposing McDonald's greedy refusal to stop serving nasty killer foods"?  In your very next sentence you ask how I "can stand by idly while corporations manipulate customers needs and demands with advertising and marketing budgets bigger than [presumably the government budgets of] most African countries."

Question: if corporations can so easily "manipulate customers needs and demands with advertising and marketing," why doesn't McDonald's simply serve raw celery?  Celery being much less costly for McDonald's to buy than ground beef and chicken patties, a raw-celery-only menu at McDonald's would slash that company's costs.  And with its nefarious facility at using "advertising and marketing" to hypnotize consumers into buying whatever it peddles (even "nasty killer foods"!), that fast-food behemoth will keep consumers spending as much on McCelery stalks as consumers now spend on Happy Meals and Egg McMuffins.  McDonald's profits will zoom upward!

Because you're correct that, like all private corporations, McDonald's is "never satisfied with lower profits when [it] can snatch higher profits," I do wonder why the raw-celery-only menu option has never occurred to the moguls at McDonald's.  Perhaps you can help me figure out why.

Sincerely,
Donald J. Boudreaux

The Scourge of Economic Nationalism, Again

EconLog's David Henderson discusses further his e-mail exchange with Ian Fletcher – a fine discussion that gives me an opportunity to discuss further the confusions that a focus on 'national economies' injects into economic thinking.

Fletcher understands the importance of savings.  But the confusions that gush forth from the wide-open nationalist spigot in his brain drowns this understanding.

(Note: in what follows I presume – likely unrealistically – that Fletcher understands just why savings is important and that opportunities to save and invest are not fixed.)

To build (say) a productive new factory requires that some resources be diverted from satistying consumption desires today and used instead to builid the factory and to equip it (and, of course, to train workers) so that greater amounts of output will be available tomorrow to satisfy greater consumption desires tomorrow.

Consider three people: Jones, Smith, and Williams.  Each works and earns his or her separate income.  We can all agree that the greater the portion of the total income earned by these three people that is saved and profitably invested, the fewer will be the consumption desires that these three people, considered as a group, satisfy today, but the greater will be the consumption desires that these three peope, taken as a group, satisfy tomorrow.

We can should all agree also that there is no objective (hence, no objectively determinable) correct amount of savings and investment – either for each of these three people considered individually or for the three considered as a group.  One's time preference is a subjective preference just as is one's apple preference or one's preference for having a pet dog.

We can should also agree that for each individual (say, Jones), he or she is very likely made better off the higher are the amounts saved and wisely invested by the other two considered as a group (in this example, Smith and Williams).  Higher savings means more capital investment and, hence, more total output and, hence also, more competition that drives real prices downward).  So even if Jones saves nothing, he is very likely made better off the greater is the savings of other people.

We can should agree that, just as Smith would increase his own material prosperity by working harder and longer, he would thereby also very likely increase the material prosperity of Jones and Williams.  Again, more total output (a 'bigger pie') and lower prices brought about by the competition to sell this greater output.

We can should agree that, even though Jones and Williams benefit the harder and longer Smith works (and, hence, suffer the lazier and less Smith works), Jones and Williams have no legally or morally enforceable claim on Smith's work effort – meaning, Smith is and ought to be free to work as hard and as much, or as lazily and as little, as he chooses.  (Ditto, of course, for Jones and Williams.)

We can should agree that, what's true for work effort is true for savings.  Even though Jones and Williams would benefit more the more Smith saves and wisely invests, Jones and Williams are neither legally nor morally justified in forcing Smith to save and invest more.  (Ditto, of course, for Smith with respect to Jones and Williams.)

Now suppose that Williams increases his savings and uses these saved resources to build a factory in town.  Jones and Smith very likely benefit even if they don't save more or otherwise change their behavior (see above).

Questions for Fletcher and other protectionists: What does it matter if Williams is a resident of the town in which the factory is built?  Are the potential benefits enjoyed by Jones and Smith as a consequence of Williams's increased saving and investment less if Williams lives not in the town where the factory is built (and where Jones and Smith reside) but lives instead in an adjoining town?  What if Williams lives on the other side of the country?  What if Williams lives in a different country?

If saving is good for Americans, the nationality or place of residence of the savers whose saved resources are invested in the American economy is irrelevant.  If saving is good for Americans, then given Americans' saving rate, savings invested in the American economy by non-Americans are a blessing – a blessing that is bigger the greater is the amount of this foreign savings and investment in the American economy.

Yes, we Americans would be even wealthier materially if we Americans saved even more – wealthier materially both as a product of many or all of us having larger financial portfolios, and as a product of the economy of which we are a part having an even greater volume of total output.  But for this very reason we Americans are made wealthier also when foreigners save more and invest their savings here, regardless of how much or how little Americans save and invest.

N.F.L.

I confess to following only one sport passionately: American football (both college and the N.F.L.).  I confess further to being what I have been since 1967: a black-and-gold bleeding fan of the New Orleans Saints.  (The first thing I read in the morning ain't the opinion sections of the Wall Street Journal, New York Times, or Boston Globe; it's not any economics tome or history volume; it is – always, daily – the Saints section of the New Orleans Times-Picayune.  No joke.  I get around to reading that less-important stuff only later.)

So as the N.F.L. labor lockout (apparently) draws to a close, the following question occurs to me:

Suppose that today a group of people form today the National Frisbee League (N.F.L.).  They develop rules for a team sport played by really good Frisbee players.  From the outset – July 18, 2011 – these National Frisbee League pioneering entrepreneurs list as among their league's rules a prohibition on any team in the National Frisbee League to pay any player more than $100,000 annually – certainly a decent salary in modern America, but not remotely close to a princely sum.

Suppose the National Frisbee League becomes wildly popular – say, similar in popularity to the National Football League.  Further suppose (hardly far-fetchedly) that, without the strict $100,000 per-player cap, many teams would compete for Frisbee talent by offering millions of dollars a year.

But no such competition is permitted by league rules.  It has never been permitted.

Questions: Would the sport suffer much?  Would this strict per-player annual-salary cap be economically unjustified (that is, should the National Frisbee League abandon – to promote its owners' own best interests – the salary cap after the owners realize just how wildly popular the National Frisbee League has become)?

The above two questions are not rhetorical.

Quotation of the Day…

… is from Leland B. Yeager's 1981 essay "Costs, Sources, and Control of Inflation," reprinted in Leland B. Yeager, The Fluttering Veil (George Selgin, ed.; Liberty Fund, 1997), pp. 33-84; the following quotation is on p. 46:

… a decent restraint in clamoring for government action to redistribute income from others to oneself is a public, not a private, good.

This quotation beautifully capsulizes one reason for the heat generated by the debate today over raising Uncle Sam's debt ceiling.  Those many non-creditors of Uncle Sam who, without disruption, would get $$$ from him if the debt ceiling were raised, insist that his ability to transfer $$$ to them from others not be hamstrung by something so bourgeois as a silly ol' debt ceiling.  (Oh – and I'm sure that the following question must have been ask at least 1,001 times during the past couple of weeks – but what's the significance or purpose of a statutorily set debt ceiling if the expectation is that it will be raised without question to accommodate the need, or simply the desire, for government to borrow more than is allowed by the existing ceiling?)

By entering the income-'redistribution' business, government – justified by so many 'scientifically' minded folks chiefly for its alleged capacity to 'solve' public-goods 'problems' – created a huge public-goods problem.

Fletcher's Zero-Sum Presumptions Shove Him Into Unmistakable Error

In the unreported parts of his e-conversation with the protectionist Ian Fletcher, David Henderson very likely made the following point.  But because David didn't quote that part of his e-debate with Fletcher, I take the opportunity here to highlight another critical way in which Fletcher is just plain wrong.  Fletcher writes:

First, you [Henderson] seem to contend that FDI [foreign direct investment] is an exception to the basic rule in economics that, in Milton Friedman's words, "there is no free lunch." That is, you ignore the fact that when foreigners make an investment in the U.S., they own the investment. That the investment took place may be a good thing, but this doesn't change that fact that when foreigners, rather than Americans, own an investment, this increases the net worth of foreigners and reduces the net worth of Americans by the same amount.

Wrong.  There is no reason to conclude that the net worth of Americans is reduced by any amount.  It is not a "fact" that an increase in FDI in the U.S. increases the net wealth of the foreign investor by some $$ amount and decreases that of some American (or Americans as a group) by the same $$ amount.  Any number of examples might suffice to show why Fletcher is utterly off-base to make such an assertion.  Here's a straightforward one:

Suppose my neighbor Smith sells his vacant lot in Virginia for $100,000 to Mr. Lee from China.  Mr. Lee then grows corn on that lot and earns profits from doing so.  Mr. Lee's net worth rises.  Has my neighbor's net worth declined?  Possibly – if he spends the $100,000 on consumption goods (which, as David ably argues, is not necessarily a bad thing; what, after all, is the ultimate goal of economic activity if not to be able to consume more?).

But "possibly" is not "necessarily," or even "probably."  If Smith spends the $100,000 to pay his way through medical school or to invest in his sister-in-law's new business venture that turns out to be quite successful, Smith's net worth increases.  It might increase by more (or by less – it doesn't really matter) than the increase in the net wealth of Mr. Lee.

Mr. Lee is richer. Smith is richer.  No American is poorer.  No foreigner is poorer.  And Lee's customers are richer (they get more or better or less costly corn as a result of Lee's efforts), as are Dr. Smith's patients or the customers of Sister Smith's booming new business.

Fletcher's mind seems so stuck in a zero-sum gear that he misses this not-at-all far-fetched possibility.

Or look at the matter from a different perspective by asking what would happen to Americans' net wealth if foreigners were to completely remove themselves – or be completely removed by Congress – from the pool of potential investors in dollar-denominated assets.  Would the value of publicly traded corporate shares currently owned by Americans rise?  Would the value of real estate currently owned by Americans rise?  Would the value of successful American start-up companies rise?

I gather that Ian Fletcher believes that the answer to these questions is an unambiguous "yes."  Do you?

…

There are ways other than the one I highlighted in my above example with Smith and Lee that FDI in America results in increases in both the net wealth of foreign investors and in the net wealth of Americans.  Take a stab in the comments section offering examples.

Some Links

I'm with Bryan Caplan: people are resources, and the world needs more of them.

Here's George Selgin on the "local currency" movement.

Here's a video from last-month's debate at The Urban Institute on the merits of private community associations.  (HT Daniel Kuehn)  Defending private community associations is the always-wise Bob Nelson.  (And here's an abstract of one of my favorite pieces of research on the topic.  [image error]   )

John Stossel discusses playwright David Mamet's new-found appreciation for the economic and ethical merits of free-market capitalism.

Undercover Economist Tim Harford delivered this superb talk, on trial-and-error, at last-week's TED conference in Edinburgh.  Superb!

Hmmm….. I wonder, I just wonder, if this might have something to do with rising health-care costs.

David Henderson debates Ian Fletcher.  Fletcher clings to the ancient superstition that voluntary exchanges that take place across the political borders of nations are mysteriously transformed by those borders into a class of exchanges fundamentally different than voluntary exchanges that take place within the political borders of nations.  And, frankly – as this dialog reveals – he argues as all defenders of indefensible superstitions argue: by distorting others' arguments and by conflating issues that must be kept separate when doing analyses.  It's to his credit – and my discredit – that David has more patience with such people than I have.

The State of K-12 Government-School Funding

Here's a letter to the New York Times:

Writing ominously that "All across America, school budgets are being cut, teachers laid off and education programs dismantled," Nicholas Kristof accuses us Americans of recklessly endangering our future ("Our Broken Escalator," July 17).

Context calms these fears.

While Mr. Kristof is correct that "70 percent of school districts nationwide endured budget cuts in the school year that just ended, and 84 percent anticipate cuts this year," a quick web check reveals that these cuts average no more than about five percent from the previous year.  Further, these cuts overwhelmingly reflect simply the completion of the distribution of the $100 billion in federal 'stimulus' funds shoveled from Washington to state school systems in 2009-2010.

More broadly, data from the U.S. Department of Education's National Center for Education Statistics show that inflation-adjusted per-pupil expenditures for K-12 public schools have steadily and dramatically increased over the past half-century.  In 2007-08 (just before the recession and the 'stimuli') real per-pupil funding was 19 percent higher than in 1999-2000, 33 percent higher than in 1990-91, 83 percent higher than in 1980-81, 129 percent higher than in 1970-71, and 272 percent higher than in 1961-62.

Mr. Kristof's portrayal of the funding of K-12 schooling in America is recklessly uninformed.

Sincerely,
Donald J. Boudreaux

Open Letter to David Sirota

Dear Mr. Sirota:

A friend just sent to me a link to your 2006 essay in the Huffington Post accusing journalist John Stossel of being "a pathological liar."  Your marquee evidence in support of this harsh accusation is Mr. Stossel's claim that "people on the margins lose jobs when minimum wages go up."  You combine your own personal astonishment that anyone could possibly say such a "ludicrous" thing with a mention of two empirical studies – one being the famous work by economists David Card and Alan Krueger – to conclude that only a pathological liar would assert that minimum-wage legislation destroys some jobs.

I presume, then, that your epistemology leads you to conclude that the author of the following paragraph, written in 1998, is also a pathological liar:

"So what are the effects of increasing minimum wages?  Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.  This theoretical prediction has, however, been hard to confirm with actual data.  Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive.  Exactly what to make of this result is a source of great dispute.  Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages 'do,' in fact, reduce employment, but that the effects are small and swamped by other forces."

The author of the preceding paragraph – who went on to describe the conclusion that raising the minimum-wage does not reduce employment as "iffy" – is Prof. Paul Krugman.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030