Russell Roberts's Blog, page 1467

Trade is Trade

Commenting on this recent post, Josh writes:

[H]ow about [Ian] Fletcher's cited argument (if I may rephrase, and nevermind his ulterior reasons for making it) that the disemployment cost (borne by few) may somehow exceed the cost-of-consumption savings experienced by many?

In pure dollars, the cost to the few can't exceed the savings of the many, perhaps, but we might agree that one person's loss of $40K earnings has more 'weight' than, say, 40,000 people saving $1 each. If I'm not being too strange, the effect of money on happiness is greater the more concentrated it is (I think of it like gravity – a constant force, whose effects are more noticeable in areas where mass is concentrated than where it ain't).

I don't think it is safe to ignore this subject. How do we deal with it?

Three replies.

First, the number of slaves in the American south prior to 1863 was much larger than the number of slave owners.  So, the benefits of the abolition of slavery (accruing mostly, of course, to the freed slaves) were spread much thinner than were the costs.  Should the costs of abolition to the slave owners have been weighed more heavily than the benefits to freed blacks from abolition?  Perhaps the costs to the former slave-holders was greater according to some 'scientific' calculus than were the gains to the freed slaves.  Can anyone prove that the gains from abolition outweighed the costs?

Even asking such questions is, at best, an exercise in pedantry – and, more realistically in the case of the abolition of slavery, obscene.

Second, and relatedly: I propose that Congress immediately impose a one-time $1 head tax on every man, woman, and child in the U.S.  The typical American household would, as a result, see its tax bill for 2011 rise by less than $3.00 – peanuts; they'll never miss it.  I further propose that Uncle Sam take, from the resulting $310 million in revenue, $60 million to cover whatever expenses he incurs to administer and collect these taxes.  The remaining $250 million will be turned over to me, Don Boudreaux.

I guarantee that the joy I would experience from suddenly finding my net worth higher by $250 million will greatly exceed the unhappiness any American suffers as a result of paying this one-time tax.  I'm also quite confident that my immensely elevated happiness would be greater even than the total – 'aggregate' – amount of felt unhappiness suffered by Americans as a group as a result of this tax.

So should this tax be implemented?  I'm pretty sure not.  And the reasons (I leave it to you to spell them out) are among the reasons why the relative 'concentratedness' of the costs of freer trade are no argument against free trade.

Third (and most importantly), there's nothing unique about international trade in raising the issue that Josh worries about.  Any economic change raises the same issue.  Consumers choosing to abandon the Atkins diet (which was all the rage about ten years ago) eliminates some jobs on cattle ranches and pig farms; the rise of MP3 players reduces the demand for clerks in music stores and for workers producing compact discs; the Internet and Amazon.com eliminated the jobs of many bookstore executives and clerks; the advent of e-books threatens to put even more book-store workers (and probably warehouse workers for even Amazon) out of jobs; improvements in the technologies for recycling cardboard and paper threaten the jobs of some lumberjacks…..  The list goes on and on and on.

It's fine to have a debate about the merits of consumer sovereignty, of competition, of innovation, and of market-driven economic change.  But if, and as long as, we accept as a matter of course that these things are on net greatly beneficial for changes in purely domestic patterns of trade and other economic activities, we do – and ought to – treat changes in trade that happens to take place across political borders with the very same strong presumption that the gains to consumers justify losses to workers.

The polity that is America

Now, with the collapse of the Florida [Orlando to Tampa] route, it looks as if the nation's first segment of true high-speed rail will be in an even unlikelier place — linking Fresno and Bakersfield, in California's Central Valley, and scheduled to end construction in 2017.

Here is more.

The transition to WordPress

I am learning how much I rely on the total familiarity of my immediate visual field.  I look at the blogging box for WordPress (which by the way isn't that different from Typepad) and I am baffled.  In the writing process everything feels molasses slow, but I will get used to it.

We are still working out some bugs, but if you are having problems with the site please let us know in the comments.  Thanks!

Buchanan on Becoming

Back in 2006 I mentioned Jim Buchanan's 1978 essay "Natural and Artifactual Man" as being one of my very favorite pieces of economic insight.  I can't find a link to this paper, so let me share here a few quotations from it, as it appears in Jim's collection What Should Economists Do? (All emphases below are in the original.)  Buchanan's appropriate dissatisfaction with mainstream economic theory is here on display.

"[M]odern economic theory forces upon us patterns of thought that make elementary recognition of the whole 'becoming' part of our behavior very difficult to analyze and easy to neglect" [p. 95].

"The metaphor of 'capital' investment seems misplaced when we think of a person's outlay of time and money on information, on knowledge.  A person is not investing with the aim or purpose of increasing the size of an objectively measured income stream in perpetuity, a stream that may be converted into consumption by the selfsame person or his heirs.  He is investing in becoming a different person that he must become as he acquires knowledge and wisdom; he cannot do otherwise than become different.  And as he does so, he must embody a different 'utility function.'" [p. 97]

"Why should anyone have ever tried to model a community of separate persons teleologically, as if somehow 'social states' could be, or should be, arrayed in some order of ascendancy, in terms of a single maximand?" [p. 108]

"Choice requires the presence of uncertainty for its very meaning." [p. 109]

"But I am here advancing the more radical notion that not even individuals have well-defined and well-articulated objectives that exist independently of choices themselves." [p. 111]

"Man wants liberty to become the man he wants to become.  He does so precisely because he does not know what man he will want to become in time." [p. 112]

Why American movies won't die

Here is a well-linked to article about how American movies are dying in terms of quality.   Ross Douthat comments.  Most of the arguments are correct, namely that too many big budget movies require a "tent pole" in terms of a connection to a comic book, a famous book (Harry Potter), a TV show, and so on.  But the article is still too pessimistic.  Here are three reasons why movie quality should survive, albeit with some cyclical fluctuations:

1. The more centrist and mainstream the big budget movies get, the more opportunities are created in the niches.

2. Due mainly to digital editing, the costs of movie production and editing are falling.  That favors innovation.  Marketing costs are rising, due to an increasing scarcity of attention, and that favors blockbusters  Still, this latter factor has self-correcting elements, as mentioned above, and many forms of marketing (e.g., the internet) are cheaper than buying network TV ads.  The cost story is complicated, but it should not over the longer run penalize quality.

3. The U.S. population is aging and this will push movies away from some of their more juvenile shortcomings.

Starve the beast means feed the machine

Joseph Daniel Ura and Erica Socker report (pdf):

The notion of starving the beast has been an important justification for major elements of the fiscal program advocated by many Republicans and conservatives over the last three decades. While the idea of restraining government spending by limiting government revenues has an intuitive appeal, there is convincing evidence the reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This seemingly perverse result is explained by Buchanan's theory of "fiscal illusion." By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens. We assess the principal behavioral prediction of the fiscal illusion strategy. Incorporating estimates of the effects of federal deficits into a standard substantive model of Stimson's mood index, we find strong support for a subjective price-driven theory of demand for government. In particular, we find that the size of the federal budget deficit is significantly associated greater demand for government services and benefits.

Assorted links

1. Mexican report on TGS (in Spanish).

2. David Leonhardt on economists' blind spots.

3. Do the opposite!

4. What would Feynman do?

5. One-third of wages.

6. "renewed philosophic interest…"

7. How did humans move away from apes?, hail the Scottish Enlightenment.

I don't understand the logic

Larry Summers on the tragedy in Japan (HT: Craig Kohtz):

"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."

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

I don't get it. By this logic, Japan should have evacuated people from the buildings and triggered the earthquake and the tsunami sooner. By this logic, they should just blow up empty buildings randomly. By this logic, their $6.3 trillion stimulus spending of the past decades should have helped their economy. By this logic, they should rebuild the buildings with shovels rather than construction equipment. Or using spoons rather than shovels.

I don't understand the logic.

Here is John Papola on Summers. He does a superb job gathering many of the Keynesian defenses of war and destruction including Keynes himself. He also does a great job explaining the illogic of the Keynesian logic. Don't miss it.

And here is the original Bastiat article on the fallacy of the broken window.

Happy Anniversary, Wealth of Nations, Part II

Here is the second part of my podcast with Caleb Brown at Cato on the 235th anniversary of the publication of An Inquiry into the Nature and Causes of the Wealth of Nations. It is just under ten minutes long.

Part I is here.

My Continuing Conversation With Ian Fletcher

Mr. Ian Fletcher

Dear Ian:

You continue to misunderstand the case for free trade.  Let's take two examples from your latest essay ("Free Trade Theory Known to be Wrong – Since 1817!"), which you exported to me yesterday by e-mail.

First, it's untrue that "The economic argument for free trade is ultimately based on the theory of comparative advantage."  Comparative advantage does supply one important basis for justifying free trade.  But as Adam Smith showed, specialization and exchange generate net economic gains independently of specialization according to comparative advantage.  Likewise with the greater ability made possible by expanding markets for producers to take advantages of larger economies of scale.

Second, contrary to your claim, the principle of comparative advantage applies even when capital is mobile.  Mobil capital can (and often does) change the pattern of comparative advantage, but this mobility doesn't eliminate comparative advantage.  The reason is that a producer has a comparative advantage whenever the amount of good A that he (or it) can produce relative to the amount of good B he can produce differs from the amount of good A that some other producer can produce relative to the amount of good B that that other producer can produce.  Unless and until the opportunity cost of producing every good and service in the world is identical for every producer in the world, comparative advantage will exist and provide occasions for mutually productive specialization and trade.

Capital mobility is highly unlikely to bring about such a weird, universal equality in productive capacities.  But if, per chance, it should do so, still no need to worry: see Example 1 (above).

Sincerely,

Donald J. Boudreaux

P.S. Stealing an idea from my former research assistant Mark Perry, I do a little editing to a part of your essay —-

This is precisely the problem Americans experience today: when imports technological advances replace goods produced here by workers with goods produced here by machines, capitalists like the higher profits and consumers like the lower prices—but workers don't like the lost jobs. Given that consumers and workers are ultimately the same people, this means they may lose more as workers than they gain as consumers.

Contrary to free-trade economic-growth mythology,  there is no theorem in economics which guarantees that workers' gains will exceed their losses under these circumstances. Things can go either way, which means that free trade innovation can be a losing move for them.  Whether it will be a losing move is a complicated question that turns on a number of different variables, but the threat is real.  The "win-win" guarantee that free traders those who celebrate advances in knowledge and innovation believe in is pure fantasy.