Russell Roberts's Blog, page 1443

More on the Economic Irrelevance of Political Borders

Writing about the economically unjustified Trade Adjustment Assistance (TAA) program in today's Washington Post, George Will gets it exactly right about the nature of that lamentable program.  Here's the heart of the column:

A government borrowing $58,000 a second cannot afford Obama's policy of Stimulus Forever, and there is this problem with TAA at any level: It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism.

Consider a hypothetical Ralph, who operated Ralph's Diner until Applebee's and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph's Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition?

Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition.

In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are "victims" of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices?

In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation's bookstores will be gone. Should the stores' former employees be entitled to special assistance beyond unemployment compensation?

My "generosity"

Dan Akerson, the head of GM, evaluates (HT: N Karr) the government rescue of GM that used my money to save his company:

At the current stock price, U.S. taxpayers would be out more than $12 billion on GM's bailout. Still, Akerson believes that, in the end, taxpayers will see the government made the right call in saving the automaker, as well as crosstown rival Chrysler.

"We are in the midst of transforming an iconic American company so 20 and 30 years from now (taxpayers) will look at this company and they'll say, 'Absolutely it was the right thing to do,'" Akerson said. "And it shouldn't be measured on did it sell for $43 or $53 (a share) or did they lose a couple billion dollars?"

GM was saved, he said, because of the extreme generosity of Americans — a spirit that helped restore Europe and Japan after World War II and rebuild cities such as New Orleans after natural disasters.

"We're the most generous country, even in terrible times," Akerson said. "We don't walk to the disaster as a nation. … We can't wait to help."

What an interesting way to describe the government forcing me to help the auto unions (HT: Mark Murphy). Generosity?

Eichengreen on the dollar

This week's EconTalk is Barry Eichengreen talking about the dollar–its role as a reserve currency, the advantages of that role for the US, and whether another currency might take over that role.

For me, the most interesting part of the conversation was a discussion of China's alleged currency manipulation to keep their exports high. Eichengreen argued that this is bad for the US as a whole–that is, it is bad that China is willing to sell us cheap stuff. I have never understood this argument in good or bad times. But Eichengreen made the argument clearly–there is a "fixed lump" of aggregate demand and by keeping the prices of Chinese products low, US aggregate demand goes to China rather than the US. I don't know what it means to say that there is a fixed lump of aggregate demand. But that's the argument. I pointed out that Keynes also embraced protectionism during the Great Depression. I am glad I am not a Keynesian. Besides the fact that I do not understand how a nation can thrive by producing things at a higher cost, the political incentives of such a view are not so healthy.

A Question for Single-Payer Proponents

I have a question for anyone who believes that a single-payer health-care system (where the single payer is government) will reduce the quality-adjusted cost of health-care: will a single-payer pet-food system (where the single-payer for pet food is government) reduce the quality-adjusted cost of pet food?  That is, under a single-payer pet-food system (with government as the single payer) will consumers be better supplied, at a lower cost, with pet food than consumers are supplied today with a free market, myriad-payer system for the provision of pet food?

If not, why would a single-payer system for health-care reduce the quality-adjusted cost of health-care?  But if so, why not socialize the entire American economy given that a single-payer system (with government as the single payer) would clearly deserve the presumption of being a superior method of economic organization than myriad-payer free markets?

….

Although I've not seen such a question asked before, I have little doubt that I'm not the first person to ask it.

Mr. Krugman vs. Dr. Krugman Again

At his blog today, Mr. Paul Krugman writes that

you don't find people like Christy Romer or, well, me taking positions on policy issues that are directly at odds with what they've said in their professional writings.

Well now.

In his June 27, 2005 New York Times column, Mr. Krugman objected to the Bush administration's approval of Chinese bids to buy the American companies Maytag and Unocal.  He began that column defensively:

Fifteen years ago, when Japanese companies were busily buying up chunks of corporate America, I was one of those urging Americans not to panic. You might therefore expect me to offer similar soothing words now that the Chinese are doing the same thing.  But the Chinese challenge – highlighted by the bids for Maytag and Unocal – looks a lot more serious than the Japanese challenge ever did.

So surely the reason Mr. Krugman offered in that column for why Chinese purchases of U.S. companies differ fundamentally from similar purchases earlier by the Japanese is compelling and consistent with his earlier writings.  You judge:

One difference is that, judging from early indications, the Chinese won't squander their money as badly as the Japanese did.  The Japanese, back in the day, tended to go for prestige investments – Rockefeller Center, movie studios – that transferred lots of money to the American sellers, but never generated much return for the buyers.  The result was, in effect, a subsidy to the United States.  The Chinese seem shrewder than that.

Overlook the obvious question of how is it that investors who use assets in ways that prove to be unproductive (that is, "never generated much return") provide "a subsidy to the United States."  Focus instead on Mr. Krugman's explanation that he approved of Japanese investments in the U.S. because Japanese investors are dumb, and he disapproves of Chinese investments in the U.S. in part because Chinese investors are smart.

I've read many of Dr. Krugman's academic books and papers and nowhere in these do I find even the faintest hint that a nation is enriched by dumb investors and impoverished by smart ones.  True, here I'm only speculating, but I'm quite confident that had Dr. Krugman been asked in, say, 1990 if a nation's prosperity is put at greater risk the smarter are the people who invest there – or, alternatively, if a nation's prosperity is more surely promoted the dumber are the people who invest there – he would have answered, unlike Mr. Krugman, with a resounding "No!"  After all, Dr. Krugman did serious economics.

….

In the same June 27, 2005 NYT column (linked above), Mr. Krugman offers a second reason (in addition to the one I mention above) for why he objects to the Chinese buying Maytag and (I gather especially) Unocal.  Here's that second reason:

The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources….

I leave to the reader to decide if this second reason is at odds with Dr. Krugman's justly famous warnings against the pop-internationalism notion that nations compete economically against each other, and against his (rather common for a sensible economist) counselling skepiticism of those who raise national-defense concerns as alleged justifications for (as Dr. Krugman writes on page 101 of Pop Internationalism) "a more nationalistic trade policy."

I leave also to the reader the task of explaining how Uncle Sam stopping the Chinese from purchasing U.S. firms prevents, in any way that benefits Americans economically, the Chinese from competing for scarce resources.

Prohibition Failed Then and It Fails Now

Seventy-nine years ago today, John D. Rockefeller, Jr. sent this letter to Columbia University President Nicholas Murray Butler. In it, Rockefeller – despite being a life-long teetotler and early proponent of alcohol prohibition (and, hence, an early proponent of the 18th amendment to the U.S. Constitution) – called for an end to alcohol prohibition.

I learned of this letter from Mary O'Grady's superb column in today's Wall Street Journal, in which she argues that the same sort of Rockefellerian honesty and integrity from today's drug warriors might help put an end to the atrocious and failed 'war on drugs.'  (I thank Mary for sending me a pdf of Rockefeller's letter.)

Indeed, the very publication of this column of Mary's today in the Wall Street Journal – a publication long known for its hawkishness on the drug-war front – is itself a hopeful sign that at least the more sensible elements of American society might soon find their way to the only reasonable conclusion on this matter: the drug war is a catastrophe in countless different dimensions and, thus, should be ended.

Should 'Progressives' Admire North Korea?

Here's a letter to the New York Times:

Nicholas Kristof says that Americans who want lower taxes and less government regulation should study Pakistan, which he describes as "a low-tax laissez faire Eden" – and which also, of course, is a decrepit economy and society ("Our Fantasy Nation?" June 5).  Never mind that, as University of Chicago law professor Todd Henderson notes, Pakistan ranks near the bottom of indices of economic freedom.*  Forget also that Pakistan is dominated by the military and benighted by liberty-suffocating superstitions.

Straw-man games such as the one Mr. Kristof plays are too easy.  Would anyone be persuaded, for example, if I wrote (paraphrasing his opening line) "With MoveOn.org progressives and many Democrats balking at reducing the role of government, let me offer them an example of a nation that lives up to their ideals" – and then presented as a shining example of a 'progressive' society North Korea?  North Korea's government, after all, offers cradle-to-grave economic supervision and protection of its citizens; incomes in North Korea are quite equal; and the government there actively directs the economy.

Would Mr. Kristof find the superficial similarities between some preferred policies of 'progressives' and the reality of North Korean society to be a serious reason to reconsider his 'progressive' beliefs?  Of course – and rightly – not.  And for the same reason no one should take seriously Mr. Kristof's absurd equation of Pakistan with an America in which people would enjoy lower taxes and fewer government regulations.

Sincerely,

Donald J. Boudreaux

* In a private e-mail to me as well as in a letter that Todd sent to the New York Times.

Yet More for the 'I Miss Julian Simon' File

In today's Richmond Times-Dispatch, I write – at the editors' request – a follow-up to my Wall Street Journal essay predicting continuing decline in deaths caused by violent weather.  Here's my closing paragraph:

As the late economist Julian Simon taught when he won a similar bet with eco-doomster Paul Ehrlich in 1990, people who put their wealth where their words are deserve to be taken more seriously than people who scream free of charge that "the sky is falling!"

Smith and Keynes Share a Birthday

In what is surely one of history's great ironies, today is the birthday of both Adam Smith and John Maynard Keynes.

Smith launched the discipline of modern economics, freeing our thinking about economic matters largely from the misperceptions and prejudices of the 'man in the street' whose instincts prompt him to suppose that most economic problems are the result of too little money or too little demand – an instinct that, in Smith's day, elevated mercantilism into the dominant mode of economic (non)thought.  This 'man in the street' gives little, if any, thought to the enormously detailed and constantly occurring and largely unseen adjustments that property owners (including owners of only labor services) must make so that the plans and actions of producers and consumers are sufficiently well-coordinated across space and time that prosperity becomes widespread and continually growing.  The 'man in the street' concentrates his worries on demand – e.g., Will consumers continue buying 'enough'?  Won't labor-saving technology (including advances in international trade) cause sustained unemployment?  What will be the jobs of the future if the familiar jobs of today are 'destroyed'?

Keynes, regrettably, gave undeserved respect to these concerns of the 'man in the street.'  The focus of Keynes and his followers was not on how the plans and actions of countless individuals can be reasonably well-enough coordinated, across space and time, so that scarce resources are ever-more-efficiently transformed into goods and services that satisfy consumers.  Overlooking – as does the 'man in the street' – the importance of the details of this vastly complicated process of on-going coordination, Keynes and his disciples glommed on to what the 'man in the street' immediately thinks of as the economic question: is there enough demand to buy stuff?  If yes, problem solved; if not, big problem – or, really, not so big if the state frees itself from the prejudices of those damned classical economists (such as Smith) and, adopting the idiot-savant genius of the 'man in the street,' augments inadequate private demand with demand that it creates either through money creation or, usually more effectively for Keynesians, through debt-funded fiscal spending.

Smith had no such delusion that economies grow simply because people demand more stuff.  The abilities and drive of butchers, brewers, bakers, and other entrepreneurs to earn ever-better livings by ever-better satisfying consumers (as opposed to by securing monopoly privileges from government) is what makes economies grow.  Competitively determined prices are important in guiding suppliers to meet consumer demands (and in guiding consumers on how to get the most satisfaction possible from their expenditures).  Taxes, regulations, monopoly privileges, and (yes, even for Smith) inadequately supplied amounts and qualities of public goods obstruct the ability of markets to coordinate savings, investment, production, and consumption in ways that keep economies growing.  Smith – and, to this day, Smithian economists – concentrate their attention on supply.  The problem isn't to get people to want to consume more of what they want; it's to get people to produce more of what people want to consume.

John Maynard Keynes, more than any other person, diverted economics from its task of understanding how order emerges unplanned from the self-interested and knowledge-limited choices and actions of countless individuals.  Far more than Marx, the consequence of Keynes on economics has been lamentable.

Walter Williams Against the State Against Blacks

John Stossel devotes an entire show to the work and insights of my great GMU Econ colleague Walter Williams: Segment 1; segment 2; segment 3; segment 4.  (HT to Reuvain Borchardt for the links.)

UPDATE: Kristi Kendall, Stossel's producers, reminds me that this show featuring Walter will be broadcast again tonight on the Fox News channel at 9pm, and again at 12am, EDT.