Russell Roberts's Blog, page 1474

Mythmaking

Some believe that the American economy was more egalitarian between the end of WWII and the 1970s or that gains were shared more equally. I think there is some truth to this claim. But I disagree with the version that says the middle class has stagnated since the 1970s. But here's an even stronger claim from Joe Klein:

It is also good to remember that America's most prosperous time — the period from the 1950s to the '70s — was also when its trade-union movement and its middle class were strongest.

Uh, no. The average person in America lives much better today than the average person in 1950 on so many dimensions. The 1950s and 1960′s and 1970s were much less prosperous.

I.O.Me

When bonds are not assets.

A Marshallian Mistake

Here's a letter to USA Today:

Thurgood Marshall indeed deserves high praise for his work to rid the United States of Jim Crow legislation (Yolanda Young, "Thurgood Marshall blazed a path for civil rights," Feb. 18).  But while on the U.S. Supreme Court, he turned a blind eye to an institution that disproportionately imprisons, disenfranchises, and discriminates against blacks: the war on drugs.

Interviewed in 1987 by Life, Justice Marshall said "If it's a dope case, I won't even read the petition. I ain't giving no break to no dope dealer."

Quite apart from the question of whether or not drugs should be legalized, Justice Marshall's practice of automatically siding with the government in every drug case gave a free pass to government officials not only to violate the Constitution in their pursuit of alleged drug offenders, but also to act on whatever bigotry and prejudices they might have had as long as these officials could claim that their actions were part of the drug war.

Sincerely,

Donald J. Boudreaux

Some Links

Andy McGlothlin discusses Julian Simon's vital idea of the ultimate resource.

Larry Ribstein offers yet more wisdom on insider-trading prohibitions.

I continue my discussion of the baleful consequences of inflation in this, my most-recent column in the Pittsburgh Tribune-Review.

Quoting Mark Perry: "Americans Have the Most Affordable Food in World & It's Never Been Better."  He's correct.

Jonah Goldberg on government-worker unions.

EconLog Bryan Caplan ponders U.S. military involvement in the Middle East – especially in light of the goings-on in that region today.

The alternative to unions

From :

MY COLLEAGUE asks an excellent question: if stronger private-sector unions aren't in the cards in America, then what? What other force do progressives think might play the role unions played in the postwar era, providing greater negotiating power for the working and middle class, so that they can try to claw back some of the 52% of all US GDP growth from 1993-2008 captured by the top 1% of the income scale and organise politically for concerns like universal health insurance?

Greater negotiating power? The effect of unions, to the extent they are effective at all, is to make it harder for people to find work in particular areas. Unions try to raise wages above what they would otherwise be. Employers respond by trying to substitute capital for labor or more skilled workers for less skilled workers.

You want negotiating power? Get educated. Get a skill. What keeps wages up in a world of 7% unionization in the private sector is that I have alternatives. So stay in school and study something serious that has value alongside whatever else you're interested in. Or study something interesting that has little market value. But if you do that, don't complain about your low salary and lack of a union.

The bottom line–you don't need a union to protect you from your employer. You need alternatives–you need to have a skill that more than one employer values. If you have no skills, you are in trouble and the union won't help you either except at the expense of other workers.

Some of the money the top 1% captured (in parts of the financial sector, for example) was unearned and came at the expense of the rest of us. Most of it, I suspect, though this is an empirical question, benefited the rest of us. I'm thinking of Facebook execs, Google execs, Lebron James and Lady Gaga. They've done wonderfully well in the last 20 years because they have a very large market for their skills.

Stop whining about inequality, per se. If it bothers you, get to work, get a skill, start a business and tell your representatives to stop bailing out losers in the financial sector.

Civil Societies Cannot be Built – They Must Emerge

Here's a letter to the Washington Post:

William Kristol argues that "American principles" require Uncle Sam to intervene more vigorously – with force, if necessary – in the revolutions now sweeping through the Middle East ("Obama's moment in the Middle East – and at home," Feb. 23).

I disagree.  While we should cheer for liberalization to grow and spread throughout the Middle East, American principles counsel our government not to interfere.  One of these principles, after all, is that government (even our own) is an inherently dangerous agent best kept on as short a leash as possible.  Another of these principles is that top-down social engineering is bound to have undesirable unintended consequences – a fact that is no less true when the social engineers are headquartered in the Pentagon and the State department as when they are headquartered in the Department of Health and Human Services and the Department of Education.  The same government that Mr. Kristol so often, and rightly, criticizes for making a mess of matters here at home is unlikely to become a shining example of efficiency, rectitude, and Solomaic wisdom in foreign lands.

Sincerely,

Donald J. Boudreaux

Economic Growth Happens When Labor Becomes More (Not Less) Productive

Here's a letter to Slate:

I enjoyed Timothy Noah's review of my colleague Tyler Cowen's book The Great Stagnation ("Don't Worry, Be unhappy," Feb. 21).  But Mr. Noah oversimplifies Cowen's thesis by suggesting that Cowen measures an innovation's merit by how much employment it creates.

It's true that Cowen notes that (as Mr. Noah reports with dismay) "the iPod has created fewer than 14,000 jobs in the U.S."  But immediately after noting this fact, Cowen rightly observes that "we should applaud the iPod for creating so much value with so little human labor" [original emphasis].

Mr. Noah is wrong to suppose that the value of innovations is found in the number of workers they employ.  Consider agriculture: the many innovations in that arena over the years – such as mechanized harvesters, chemical fertilizers, and bio-engineering to increase crop yields – have dramatically reduced the number of people employed in agriculture.  Would we be remotely as wealthy as we are today if it still took nine of us to feed every ten of us?

Economic growth is overwhelmingly the proximate result of innovations that allow fewer workers to produce more output – thereby releasing that most precious of all resources, human labor, for use in producing goods and services that earlier were too costly to produce.

Sincerely,

Donald J. Boudreaux

Why Do We Take These People Seriously?; Exhibit #34,577

Here's a letter to USA Today:

Budget director Jacob Lew assures us that Social Security is solvent because the Social Security "trust fund" contains lots of U.S. Treasury bonds "backed with the full faith and credit of the U.S. government – and are held in reserve for when revenue collected is not enough to pay the benefits due" ("Social Security isn't the problem," Feb. 22).

Yes, the Social Security "trust fund" is indeed filled with ample quantities of interest-bearing U.S. treasuries.  But the same organization (Uncle Sam) that is the creditor on these treasuries is also the debtor on them.  Ask: when Uncle Sam cashes in these treasuries to get funds to pay promised Social Security benefits, who pays Uncle Sam the principal and interest on these treasuries?  Answer: Uncle Sam – who must, of course, raise taxes on flesh-and-blood people to get the dollars that he pays to himself so that he can then pay out promised Social Security benefits.

I.O.U.s written to one's self are not assets.  They are, instead, pathetic reminders of one's gross financial irresponsibility.

Bernie Madoff is in jail – rightly so – for duping people with the same sort of financial flim-flammery that the White House budget director today peddles in your pages.

Sincerely,

Donald J. Boudreaux

UPDATE: Jim Agresti, President of Just Facts, sent to me the following e-mail: "In the words of the Clinton Administration's 2000 budget proposal, the Social Security trust fund does 'not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.'"

The power of the rich

I have written here a number of times in recent weeks about how Wall Street and the banking industry benefited from policy interventions over the last 35 years or so and helped create the crisis. This post is an example of what I have been writing. I think fixing the relationship between the financial sector and the power of government, particularly the Fed, is the single biggest problem we face as a democracy and as an economy. The exploitive nature of this relationship, what is often called crony capitalism, has led to terrible misallocations of capital and to resentment from the body politic about the fairness of the political process.

But I do not believe we live in an oligarchy where the rich control the political process in the way they do in some other countries. Paul Krugman, for example, writes as if that were the case:

On paper, we're a one-person-one-vote nation; in reality, we're more than a bit of an oligarchy, in which a handful of wealthy people dominate.

Given this reality, it's important to have institutions that can act as counterweights to the power of big money. And unions are among the most important of these institutions.

You don't have to love unions, you don't have to believe that their policy positions are always right, to recognize that they're among the few influential players in our political system representing the interests of middle- and working-class Americans, as opposed to the wealthy. Indeed, if America has become more oligarchic and less democratic over the last 30 years — which it has — that's to an important extent due to the decline of private-sector unions.

I don't believe Krugman's argument passes the sniff test. I don't think labor unions represent the interests of middle- and working-class Americans today or thirty years ago. I don't think the increasing oligarchic nature of our democracy comes from the decline of private sector unions. If anything, it comes from the willingness of economists like Paul Krugman to defend Fed and Treasury interventions as laudable and unavoidable.

Here is Bob Herbert in a similar vein:

It doesn't really matter what ordinary people want. The wealthy call the tune, and the politicians dance.

So what we get in this democracy of ours are astounding and increasingly obscene tax breaks and other windfall benefits for the wealthiest, while the bought-and-paid-for politicians hack away at essential public services and the social safety net, saying we can't afford them.

These kind of columns in the New York Times sell papers. Readers of the New York Times like feeling that they are victims of some conspiracy to run the country for the benefit of the wealthy. And there is no doubt that Krugman and Herbert are half right–the rich get more say than the little guy. The financial sector and other sectors do play a large role in making sure legislation serves them. That is why I want less powerful government. I don't know what Krugman and Herbert want. Better government, I guess. Regulation that serves the little guy even though the politicians have little incentive to serve the little guy.

But they are only half right. The rich don't run the country. They have more power than the poor, yes. But it is hard to understand how essential public services, say, and the safety net are being destroyed or that the rich control the spin on the policy issues when you look at the overall level of government spending and taxes. Government spending has never been bigger. Is that what those rich elites are doing with their political power?

And what about taxes? I know we hear endlessly about how the Bush tax cuts were a giveaway to the rich. But look at the data. These data are from the CBO–from here and here. The first is effective federal tax rates–what proportion of income does a person pay in federal taxes. Federal taxes includes the income tax, but it also includes the payroll tax (which is regressive) the corporate income tax and various excise taxes. The CBO tries to estimate the incidence of those latter taxes as best they can. Here is what it looks like by quintile between 1979 and 2006:

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You can see the effects of the Bush tax cuts–the effective tax rate on the rich goes down. But so does the effective tax rate on all the groups. Basically the rich pay about the same tax rate as they did in the mid-1980s. Everybody else pays less.

What about the rich's share of the total tax burden? For every dollar of revenue to the federal goverment, what proportion comes from the top quintile vs. the rest of the distribution? Again, here are the CBO data:

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Not exactly an oligarchy. Maybe it's at the very top where the power happens? Here are the CBO numbers from 1979 to 2005 (I got lazy and didn't add in the 2006 numbers to the spreadsheet–it changes nothing) for the top 10%, the top 5% and the top 1%:

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Maybe these numbers should be even higher than they are. Or lower. Or maybe all the numbers should be higher instead of spending being lower because of the deficits we're running. All I'm saying is that these aren't very supportive of the idea that the rich run the country or that they've caused tax policy to change in their favor by some dramatic amount or that they don't pay much in taxes.

Observation on the U.S. Trade Deficit

Here's a letter to the New York Times:

I enjoyed your report on how Hyundai's automobile-production operations in Alabama provide better economic opportunities to Alabamians and raise wages in that state ("Hyundai's Swift Growth Lifts Alabama's Economy," Feb. 19).  Such capital investments are indeed indispensable for widespread economic growth.

It's worth noting that Hyundai's investments in these facilities – which increase the stock of productive capital in operation in the U.S. – add to America's trade deficit.  Rather than Hyundai cashing out its dollars by purchasing American exports – expenditures which would have narrowed America's trade deficit – this Korean company expanded that deficit by instead using those dollars to build productive facilities and machines in America.

This fact should give pause to the countless politicians and pundits who insist that a rising American trade deficit is necessarily a symptom of American economic decline, a contributor to this decline, and evidence of 'unfair' trade practices by foreign governments.

Sincerely,

Donald J. Boudreaux

QUESTION: How is my point changed, if at all, if it's the case that Alabama's government used inappropriate (by whatever criteria) economic policies – policies especially favorable to Hyundai – to attract that company to invest in Alabama?