Russell Roberts's Blog, page 1478

Hebrew subtitles for "Fear the Boom and Bust"

They're here. It would be nice if someone could figure out how to get them into YouTube. They rhyme which is lovely. The plain old English version is here.

Cowen on the Great Stagnation

The latest EconTalk is Tyler Cowen discussing the ideas in his new e-book, The Great Stagnation. Here are the opening few minutes:

The whole thing is here.

And That's Assuming the Cuts Actually Occur

Here's a letter to the Wall Street Journal:

After describing Pres. Obama's proposed budget for fiscal 2012 as reflecting "dramatic cuts to federal spending," you write "He ended up with a product that offers up more than $1 trillion in deficit reductions over a 10-year period – three-quarters coming from spending cuts and the balance from tax increases or the elimination of existing tax breaks" ("Obama Releases $3.73 Trillion Budget," Feb. 14).

In other words, over the course of a decade, annual spending will be cut by an average of $75 billion.

Only by Washington standards does a two-percent spending cut qualify as  "dramatic."

Sincerely,

Donald J. Boudreaux

One of my friends at Florida State, Lora Holcombe, alerted me to this telling graphic that exposes the size of the proposed FY 2012 spending cuts.

Buy Virginian!

Carpe Diem's Mark Perry – a GMU Econ Ph.D., I proudly note – is the 21st-century's Frederic Bastiat.  Here's an example of why my claim is true.

Kling on PSST

Here is an excerpt from last week's EconTalk with Arnold Kling–Arnold summarizing what he means by "patterns of sustainable specialization and trade" and the relationship to comparative advantage.

EconTalkDemoKling

The entire podcast is here.

Bad Reporting

Here's a letter to the Richmond Times-Dispatch:

You report that "A widening [trade] deficit is bad for the U.S. economy.  When imports outpace exports, more jobs go to overseas workers than to U.S. workers" ("Trade deficit widens to $40.6 billion," Feb. 13).

Untrue.  Another name for a trade deficit is a "capital-account surplus."  Save for rare instances of dollars being hoarded or used as circulating media abroad, every dollar of a U.S. trade deficit is a dollar of foreign investment in America.

Suppose that in 2011 Richmonders buy $1 billion worth of goods and services from Charlottesvillians, but Charlottevillians buy no goods and services from Richmonders.  Further suppose that Charlottesvillians use this billion dollars to invest in Richmond – such as building retail outlets in Richmond; buying stock in Richmond-based corporations; buying bonds issued by Richmond's government to fund road improvements.  Richmond will have a $1 billion trade deficit with Charlottesville.  But are Richmonders harmed?  Do the investments made by Charlottesvillians in Richmond fail to expand Richmond's economy, fail to increase its capital stock, and fail to increase economic opportunity in that city?  Does Richmond lose jobs as a result?  Of course not.

And so it goes especially at the national level.  Because nearly every dollar of the U.S. trade deficit represents foreign investment in America, only economically illiterate reporters assert that a U.S. trade deficit, as such, "is bad for the U.S. economy."

Sincerely,

Donald J. Boudreaux

For the record, my argument is not that a trade deficit necessarily is evidence of good economic fundamentals, performance, and tidings.  It often is such, but it can also, at other times, be evidence of economic mischief – such as when the U.S. trade deficit rises as a result of foreigners buying more U.S. treasuries.

But even in such cases the foreign investments do not cause the underlying problems – and those underlying problems will not be solved with trade restrictions.  Moreover, – especially given that the underlying problems have nothing to do with trade – whatever these underlying problems are, their ill-consequences are likely reduced by foreign investment.  Most obviously, foreign purchases of U.S. treasuries reduce the cost to Americans of shouldering the burden of Uncle Sam's deficit financing.

Buy American?

Mr. Randy Erwin

Buy America Challenge blog

Dear Mr. Erwin:

Thanks for exporting to my household a link to your Feb. 12 blog post "Record Crushed: U.S. Trade Deficit with China – $273 Billion in 2010 – Biggest Ever Between Two Countries."  In it you write that

We can solve our country's economic problem ourselves by changing our buying habits just slightly and buying American more often.  The average adult consumes $700 per month in imported goods.  If we could reduce that to $517 per person per month, we would have no trade deficit at all.  With no trade deficit, we would likely have 3-4% unemployment.  All we need to do is reduce our consumption of imported goods 25% to have jobs again in this country.  That will secure our long-term economic future (a.k.a. our children's future).

I've some questions for you.

- Because "buying American more often" means buying low-priced imports less often, Americans' spending power will shrink.  Americans will then have less money to spend at the movies, at local restaurants, on premium cable-tv packages, and the like.  How do you know that the job losses that result from contractions in these industries won't offset whatever job gains emerge in other industries from "buying American more often"?

- At least half of all U.S. imports are inputs used for production here at home by American firms.  So if American firms substitute more costly American-made inputs for lower-priced imported inputs, many American firms' costs will rise.  These firms will lose market share.  How do you know that the job losses that will result from these firms' contractions and bankruptcies will not offset whatever job gains emerge from "buying American more often"?

- Because every dollar of America's trade deficit is a dollar invested in the U.S. economy – investments that overwhelmingly expand the volume of America's productive capital assets above what this volume would be without these foreign investments – eliminating America's trade deficit will likely result in a net reduction of investments in the U.S. economy.  How will less investment "secure our long-term economic future"?

I have other questions, but I'll content myself with asking only the above three.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA 22030

"Ron" Boudreaux Responds to Ian Fletcher

Here's a letter to the Huffington Post:

The only forgivable error among the many in Ian Fletcher's most-recent effort to convince your readers that American manufacturing output is inadequate is that he misspells my first name ("Yes, American Manufacturing Really Is in Trouble," Feb. 12).

In response to data offered by myself, by Dan Griswold, and by others, that real U.S. manufacturing is at an all-time high, Mr. Fletcher notes correctly that "the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it."  But he then immediately runs off the rails: "And this is where American manufacturing is clearly falling short, because America is running a huge trade deficit in manufactured goods, and we don't produce enough of anything else (raw materials, services) to cover the gap.  So instead we borrow and sell off existing assets to pay for import."

Two points.  First and most obviously, by this logic Mr. Fletcher can just as well argue that America's service-sector output is too low as he argues that American manufacturing output is too low.  Because the U.S. trade deficit would narrow no less with a $1 increase in service exports as with a $1 increase in manufactured exports, neither the existence of a general U.S. trade deficit nor of a U.S. deficit in the trade of manufactured goods is evidence that U.S. manufacturing output is too low.  Service, mining, or agricultural output can equally be accused of being too low.

Second and most importantly, Mr. Fletcher doesn't understand what a trade deficit is.  An increase in the U.S. trade deficit does not necessarily mean that Americans are borrowing more or are selling off assets.  The volume of productive capital assets is not fixed.  Foreigners who invest dollars in creating and expanding businesses in America increase America's capital stock without either putting Americans further in debt or decreasing Americans' ownership of assets.  Given that America is the world's leading destination for foreign direct investment, it hardly seems plausible that the U.S. trade deficit is evidence of American impoverishment or of inadequate production.

Sincerely,

Donald J. Boudreaux

Some Links

Nick Schulz offers much-needed perspective on today's high-tech economy.

Carpe Diem's Mark Perry has revealing data on U.S. exports to – and imports from – China.

My old buddy Tom Miller wants Obamacare repealed.

Marlo Lewis offers a fascinating free-market perspective on 'sustainability.'

Paul Jacob offers his welcome common sense on innovation.

Worried about Wikipedia being male-dominated?  Heather Mac Donald isn't.

Worried about a rising U.S. trade deficit?  Dan Griswold isn't.

Yet More Evidence Against the Doctrine of Protectionism

On page 660 of their superb article – "Services Trade and Policy" – in the September 2010 issue of the Journal of Economic Literature, Joseph Francois and Bernark Hoekman include a graph (from a 2009 working paper by Batshur Gootiiz and Aaditya Mattoo) showing that countries with less-restrictive services-trade policies generally have higher per-capita incomes than do countries with more-restrictive services-trade policies.

No surprise there.

An earlier, ungated version Francois's and Hoekman's informative paper is here.  See Fig. 4.1 on page 67.