Russell Roberts's Blog, page 1465

Fear China?

Here's a letter to the Detroit Free Press:

Unnecessary anxiety is stirred up by pundits, such as Mike Thompson, who bemoan China surpassing America in total annual value of manufacturing output ("China is now the world's biggest manufacturer," March 17).  This fact, according to Mr. Thompson, is ominous for America, not least because more output by China allegedly causes higher unemployment in the U.S.

Forget that China's population is four times larger than America's (meaning that Americans still produce nearly four times more manufacturing output per person than does China).  Instead recognize that most manufacturing job losses today come not from expanding trade with China or any other geopolitical region, but from advances in technology – advances in mechanization, computerization, and chemical processes.

The place to which America is losing manufacturing jobs, therefore, has no geography, although it's very real.  Call it "Technologia."  Technologia has a huge and growing capacity to produce and export valuable goods using ever-more skilled and numerous Technologian workers with names such as "Motor," "Stamper," "Robot," "Software-program," and "Solvent."  These workers toil with superhuman stamina and discipline, they're paid nothing, they receive no worker protections, and they never strike.  And Technologia's workforce is forever learning to do, at consistently falling costs, what some American workers do.

Yet few of us worry about trade with Technologia, whose export agents keep cutting the prices they charge for the many imports we receive from that highly productive region.  With the exception of some Luddites and technophobes, we rightly celebrate our receipt of Technologia's massive and low-cost outputs and we understand that Technologia's exports make us richer.  Why, then, do we have a more hostile attitude toward goods and services imported from geographically identified economies such as China?

Sincerely,

Donald J. Boudreaux

Some Links

George Leef responds to Paul Mattick's dismal essay "Capitalism's Dismal Future."

Thanks to EconLog's David Henderson for pointing out this spot-on essay by Michael Kinsley – a writer always worth reading (even though I disagree with him about 80 percent of the time).

I love Heather Mac Donald.

Should antitrust regulators harass mobile-telephony providers over fees for texting?  Ryan Young rightly and wisely says "no."

Here's Cato's Michael Tanner on Obamacare.

TARP was no win for taxpayers – so argues my friend Paul Atkins and co-authors in the Wall Street Journal.

And here's Pat Michael's on the Chevy Volt – a car that could have been produced by Atlas Shrugged Motors.  (HT Lyle Albaugh)

Solving the Puzzle

Coordination Problem's Steve Horwitz riffs on a brilliant [image error] economic analogy to help explain an important difference between Austrians and Keynesians.  Here's a key passage:

The argument for stimulus spending by Keynesians amounts to saying we need to activate idle resources either without thinking about whether the puzzle pieces actually fit together or, more subtly, not thinking about, or not caring about, whether they produce a meaningful pattern.  The point is just to make sure they are being "used."

Steve's point seems to fit well with Arnold Kling's concept of Patterns of Sustainable Specialization and Trade (PSST).

Essay on Keynesianism, Part the First

Running the risk of over-simplifying only a teeny bit, I propose that the key difference between the Keynesian/man-in-the-street view of the economic problem and a non-Keynesian view of the economic problem is the following: Keynesians/men-(and-women)-in-the-street sense that the dominant economic problem is super-abundance (and its attendant problem, excess capacity), while non-Keynesians understand that the dominant economic problem is, and will always be, the ubiquity of scarcity.

How else to explain the prevalence – as predictable as beer at a frat party – of claims that this tsunami or that hurricane or those terrorist attacks, for all of the human agony that these calamities cause, will strengthen the economy?  Or looking at matters from the reverse, how else to explain the widespread fear that increasing trade with foreigners will cause permanent, or at least long-lasting, "loss of jobs" in the domestic economy?

If your sense of the chief economic problem is something close to mine, you sense that that problem overwhelmingly involves figuring out how to satisfy more human desires than currently are being satisfied.  You sense also that the 'failure' to satisfy more human desires is a result of the scarcity of resources, along with limitations on the technologies, and on the legal and cultural institutions, that determine how scarce resources are transformed into valuable goods and services.  The chief problem, in short, is one of scarcity.

If, on the other hand, your sense of the chief economic problem is something close to what J.M. Keynes, God rest his soul, believed it to be, you sense that that problem is one of super-abundance – a problem rooted in the curse of oceans of resources kept idle by lack of consumer demand.  There's just too much stuff, and too much capacity and labor available to make stuff, to ensure that all resources available for employment are actually employed.  Labor being a productive resource – and one whose employment we (rightly) care about especially deeply – is among those resources which are generally, or at least very often, super-abundant.

Keynesianism, as I (and others) have said many times, is man-in-the-street "economics" – that is, it's the economics that people (even smart people) stumble into before they are tutored in analytical economics and learn some economic history.  (This is not to say that everyone who is tutored in analytical economics and exposed to economic history turns into a non-Keynesian.  Far from it, alas.)

Every semester in my Principles of Microeconomics course when I explain that Adam Smith celebrated an increasing division of labor in part because it promotes mechanization, invariably a number of students shake their heads and wonder why Smith celebrated increased mechanization: "It destroys jobs," these 18-year-olds, with only a few minutes of economics as yet under their belts, lament.

Untrained in economics, these young men and women simply assume that the increased volume of valuable outputs possible now to produce in industries X, Y, and Z by workers released by mechanization from industries A, B, and C will never be produced.  A lack of imagination combines with an as-yet undeveloped ability to think like an economist – and a yet-to-be encountered exposure to economic history – to cause these students to see only idle workers.  The problem isn't scarcity, as these students see matters; it's insufficient demand.  Workers who can produce stuff but who are in a situation in which no one wants whatever it is these workers can produce.

The naïve concern is that consumers, for whatever reason, just don't want enough stuff, or entrepreneurs are insufficiently bold and imaginative to figure out new stuff to produce that will spark consumers' interests.

This primal, widespread, pedestrian concern was, of course, elevated by J.M. Keynes and his followers into an "economic" theory.  Keynes, Alvin Hansen, John Hicks, Paul Samuelson and others did indeed construct internally consistent theories (even "models" offering magnitudes measurable in principle) in which superabundance of stuff is an "equilibrium" – not a rare and fleeting situation, but a frequent and potentially long-lasting situation.  A situation so likely (and so likely to last long) that active, ever-vigilant government policy is required to counteract it.

Super-abundance of productive resources (especially labor) became the dominant threat perceived by Keynesian economists in the same way that super-abundance of productive resources (especially labor) has long been the dominant threat perceived by cab drivers, poetry professors, hydraulic engineers, 18-year-old college freshmen, and nearly everyone else unexposed to economics.

But this poetry-professor-&-hydraulic-engineer view of the economic problem is so very much at odds with the fact that people the world over – even the wealthiest of people in the wealthiest of countries – still grasp for more stuff.  Still want more toys and more experiences and more entertainment and more creature comforts and more of much other stuff and sensations.  And it's at odds, too, with the fact that entrepreneurs (greedy bastards that they are) seek to get rich by supplying all this more stuff and sensations.

It's at odds, in short, with foundational economics.

More on the 'Trust-Fund' Fraud

Here's a letter to the Washington Post:

Don McDaniel writes about the U.S. Treasury bonds held in the Social Security 'trust fund' that "Far from being 'worthless IOUs' [as claimed by Charles Krauthammer], the investments held by the trust funds are backed by the full faith and credit of the U.S. government.  The government has always repaid Social Security, with interest.  The special-issue securities are, therefore, just as safe as U.S. savings bonds or other financial instruments of the federal government" (Letters, March 15).

The question is whether or not Uncle Sam will have enough assets in the future to pay all of his obligations under Social Security.  When sensible people such as Charles Krauthammer and Robert Samuelson note that these obligations are so massive that honoring them in full will require drastic tax hikes or spending reductions, accounting-challenged defenders of the status quo exclaim "Not to worry!  The Social Security trust fund holds lots of U.S. Treasury bonds.  Those bonds are assets.  So Social Security's obligations are covered!"

But those bonds are held by the same party that issued them, namely, Uncle Sam; the creditor here is one with the debtor.  If Uncle Sam's future stream of tax receipts falls short of his future spending obligations, meeting those obligations will require tax hikes or spending cuts.  The bonds in the 'trust fund' are no independent source of revenue for Uncle Sam to tap into to meet his Social Security obligations as these bonds would if they were issued instead by, say, Microsoft of by Her Majesty's government in the U.K.  Revenues used to redeem the bonds held in the 'trust fund' must be raised through Uncle Sam's power to tax – the very same power that Mr. Krauthammer and others warn will have to be exercised in a much more Draconian manner if Uncle Sam doesn't rein in the growth of entitlements.

Sincerely,

Donald J. Boudreaux

Open Letter on Fletcher's Silliness about Sovereignty

Mr. Ian Fletcher

Dear Ian:

You trot out in the Huffington Post the tired argument that whenever the World Trade Organization (WTO) rules against the United States, U.S. sovereignty is violated ("WTO Sides With Chinese State Capitalism Against the U.S.," March 14).

Nonsense.  Uncle Sam has the Constitutionally granted power to enter into treaties with other governments.  The WTO is nothing more than the creation of a treaty – to which Uncle Sam voluntarily agreed – that has among its provisions a mechanism for settling disputes that arise under that treaty.  Abiding by the rulings of the WTO's dispute-resolution panel no more reflects (as you darkly describe it) the U.S. government having "signed over the right to rule on the legitimacy of our policies" than does, say, your agreement to abide by the rulings of your homeowners' association reflect your having signed over to a third-party the right to rule on the legitimacy of your actions.  In both cases, the anticipated benefits of contracting with others outweigh the anticipated costs, and in neither case is any party obliged to remain a party to the contract.

More to the point, if you're so concerned about sovereignty, why do you champion government using force to strip each American of his individual sovereignty to spend his money as he wishes?  Frankly, the sovereignty that matters to me isn't the sovereignty of the state – which so often is used to violate the sovereignty of individuals – but, rather, my personal sovereignty as a free human being.  Protectionism is a frontal and obnoxious assault on that sovereignty.

Sincerely,

Donald J. Boudreaux

Slick Argument

Roland Hwang is quoted in today's edition of USA Today arguing that

America consumes roughly one-quarter of the world's oil, yet we are home to less than 2% of the globe's proven oil reserves.  So much for 'drill, baby, drill.'  Even if we were to drill a hole everywhere in the country that has oil and drain every drop, we'd have enough to last us just about three years.

Whatever good arguments there might be for not easing restrictions on drilling, Hwang's isn't among them.  The reason is that the size of any nation's proved oil reserves is in part an artifact of that nation's policies on drilling.  Here's how the Society of Petroleum Engineers defines "proved reserves":

Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations.

So the very fact that Uncle Sam prohibits drilling on, say, ANWR keeps America's proved reserves lower than they would be without this prohibition.  The current small size of proved petroleum reserves, therefore, cannot legitimately be cited as a reason not to ease drilling restrictions.

Also, as Greg Staff points out by e-mail, "volumes reported as 'proved reserves' will go up and down with the per barrel price of oil."

Some nuance on destruction

This is Summers Part III. Here are Part I and Part II.

In the aftermath of the quake and tsunami in Japan, Larry Summers talked about the human tragedy and then gave his thoughts on the economic impact:

"If you look, this is clearly going to add complexity to Japan's challenge of economic recovery," Summers said. "It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength."

In Parts I and Part II I discussed why I thought this conclusion was bizarre. It unmistakenly suggests without qualification, that there can be a positive financial impact from destruction.

As some commenters pointed out, GDP is a flow and wealth is a stock. That is, GDP compares the change in output over time while wealth is a snapshot. So it is possible to lose wealth (destroy buildings) while GDP goes up. It's possible. I don't think it's very likely but it's possible. In this sense, an increase in GDP is a misleading measure of well-being. Is that what Summers meant? It's not consistent with his remarks about gaining "economic strength."  He doesn't say anything about this distinction. And as I pointed out in Part II, Paul Krugman offered no qualifications of this kind when he said that the destruction of the Twin Towers could lead to economic growth.

Some commenters (Tim Worstall, for example) pointed to savings or the liquidity trap as a way to make sense of Summers's remarks. Yes, during a recession, some people hold their wealth in the form of cash and do not spend all of it. So if I have nothing to spend my money on or if savings are not being invested, then spending will be lower than it otherwise would be. In the Keynesian story, this is why spending of any kind is essentially a free lunch–there's no foregone consumption or investment. I confess I have trouble understanding this argument. Oh I understand how it works in the model. But in reality, is this plausible? Yes, there are always resources that are unused at any point in the economy. Always. Even when unemployment is "only" 4%. But there is also a very imperfect match between any particular spending increase and connecting it to those unused resources. But even if you believe that some spending creates some output that wouldn't have been there otherwise, surely that isn't true of all spending at all levels. So you'd still want to qualify your remarks on spending creating economic strength.

As John Dewey pointed out in a comment, the destruction doesn't simply destroy bricks and mortar. Much of what has been destroyed is part of the productive capacity of Japan. So suggesting that somehow rebuilding buildings is adding to GDP holding everything else constant is a silly statement. You can't hold everything else constant. Look at this horrifying video and tell me if you think recovering from this tragedy is going to increase GDP in Japan or lead to increased economic strength.

Cleaning up the mess and rebuilding are going to mean many sacrifices that wouldn't be necessary in the absence of the destruction. Japan is going to be poorer for a while. Not richer. And the loss of capital means the losses will extend over time.

Destruction is bad for the economy and yes, even bad most of the time, maybe all of the time, for measured GDP. The remarks by Larry Summers (and by Krugman in the aftermath of 9/11) imply otherwise. If they have something more subtle in mind, they should say so.

Pseudo-Science

Here's a letter to the New York Times:

Roger Cohen is impressed with modern-day "happiness" researchers who – basing their judgments upon responses that ordinary people offer to survey questions asked by these researchers – conclude that economic prosperity does little to make people happier ("The Happynomics of Life," March 13).

Mr. Cohen and these researchers should read Bourgeois Dignity (2010) – the latest book by economist/historian/linguist/rhetorician/philosopher Deirdre McCloskey.  She writes the following about the methods used by typical 'happiness' researchers who employ "self-reported declarations" about how each surveyed person ranks his or her happiness on a scale of, say, one to three, with "two" being "pretty happy" and "three" being "very happy": "An interviewer surprises you on the street, puts a microphone in your face, and demands to know 'Which is it, 1, 2, or 3?'  Even the technical problems with such calculations are formidable.  For one thing, a noninterval scale is being treated as an interval scale, as though a unit of 1.0 between 2 and 3 were God's own view of the differences between 'pretty' and 'very.'  It would be like measuring temperature by asking people to rate things as 'pretty hot' = 2, 'very hot' = 3, and expecting to build a science of thermodynamics on the 'measurements' thus generated" [p. 63].

Such a research method is a most unhappy means for achieving deeper understanding.

Donald J. Boudreaux

A slightly different, yet complementary, objection (there are many) to 'happiness' studies is offered by my colleague Dan Klein in a recent e-mail to me:

Adam Smith was average height for his day. If asked how tall he is, he would say, "average."

But today he would be short.

The respondents' scale is context dependent.

Melloan on Bastiat on What Is Seen and What Is Not Seen

In today's Wall Street Journal, the great George Melloan weighs in on the question of whether or not last-week's Japanese earthquake and tsunami will prove to be good for the Japanese economy.  Here's a key passage:

Larry Summers, President Obama's former economic adviser, has postulated that post-earthquake reconstruction may even stimulate the rate of economic growth, as was the case after the Kobe earthquake in 1995. Well, maybe, although that is not certain given the damage to Japan's electric power grid from the nuclear facilities that had to be shut down because of earthquake-related cooling problems. Greater GDP growth also would hardly compensate for the massive losses in lives and national wealth. As the great 19th-century economist Frederic Bastiat taught in the "fallacy of the broken window," the GDP growth that comes from reconstruction brings no net gain in society's wealth. It just replaces, over time, what was lost. "Destruction is not profitable," he wrote.

Some economists have hoped that the disaster, by unifying the Japanese people and the political class in the task of bringing about recovery, will lead to necessary policy reforms, like a slimming of the government bureaucracy. Such can be hoped. Disasters do create new unity and resolve.

But the opposite case can be made as well. The Japanese political class, as with the current regime in Washington, is heavily influenced by Keynesian theories that see a government solution for every problem. For example, it seems unlikely that Japan will alter its postal savings system—which victimizes small savers with low returns—at a time when the government will face large new expenditures for infrastructure repairs. Nor is it likely to embark on a reduction of the massive national debt.