Russell Roberts's Blog, page 1479

Not All Competition is Productive

With apologies to Mark Perry, here's a letter to the Washington Post:

You report that "Many economists say the value of the currency is being held at an artificially low level as a way for China to help its exporters, whose goods are comparatively less expensive because of the exchange rate.  The issue has been politically volatile in the United States, and this week members of Congress reintroduced legislation, approved by the House last year, that would impose duties to offset the effects of an undervalued currency" ("U.S. files two new trade cases against China with WTO," Feb. 12).

Reality is better revealed with a bit of editing:

'Many economists say the Chinese government taxes its citizens directly and through inflation to suppress the value of the yuan in order that Chinese exporters can offer especially good deals to American consumers.  The issue has been politically volatile in the United States, and this week members of Congress reintroduced legislation, approved by the House last year, that would show the world that Washington is as intent as is Beijing to tax and otherwise pick its citizens' pockets in order to bestow special privileges on politically forceful domestic producers.'

Sincerely,

Donald J. Boudreaux

Unhealthy Care

Here's a letter published in the 12 Feb. 2011 Washington Post:

Health and Human Services Secretary Kathleen Sebelius wrote that "The Affordable Care Act puts states in the driver's seat because they often understand their health needs better than anyone else – and that is why it is so frustrating to hear opponents of reform falsely attack the law as 'nationalized health care' " ["Health-care reform, the states' way," Washington Forum, Feb. 11].

She missed the point. Calling Obamacare "nationalized health care" expresses opposition to the displacement of private decisions and market competition by decisions made by government. The fact that state governments are "leading" (as Ms. Sebelius says) this effort to displace markets with government control is irrelevant.

Put differently, those of us who oppose Obama-care dispute Ms. Sebelius's claim that "states . . . often understand their health needs better than anyone else." States have no health needs. Individuals and families do. And by turning more control of health-care provision over to government, Obama-care further strips those of us with health needs of the power and responsibility to make our own choices as each of us – rather than government – sees fit.

Donald J. Boudreaux, Burke

Kirzner, Schumpeter, and At Least Two Dimensions of Competition

Here's a paper that I wrote back in 1986 or 1987. In it, I attempt to explain how non-price competition can be equilibrating.

Open Letter to Donald Trump

11 February 2011

Mr. Donald Trump

New York, NY

Dear Mr. Trump:

Congratulations on your successful talk at the recent CPAC gathering.  Please, though, indulge me as I ask you a few questions.

You promise that, as U.S. President, you won't raise taxes.  But you also promised to obstruct trade between Americans and the Chinese, presumably by raising tariffs.  Because tariffs are simply taxes on imports, you can't avoid raising taxes if you raise tariffs.  So will you or will you not raise taxes?

You advocate, not free trade, but "fair trade."  Can you define "fair trade"?  If I voluntarily buy from Mr. Lee and Mr. Lee voluntarily sells to me, can such an exchange ever be unfair?  Both parties to the exchange presumably gain, while the only people who lose are Mr. Lee's competitors.  Given your claim that the billions of dollars worth of profits that you've earned are evidence of your own remarkable "intelligence and abilities," surely you don't wish to tilt the playing field in favor of domestic producers, for to do so would be to give these producers unfair advantages in winning the patronage of American consumers.  Any profits they make under such unfair circumstances wouldn't be evidence of intelligence and ability but, rather, of political connections and monopoly power.  Wouldn't such protection from competition be unfair?

You assert that "We are rebuilding China because we buy their products."  What do the Chinese do with the dollars that we use to buy their products?  Do they burn these dollars or otherwise not use them commercially?  (If so, is that bad?)  If the Chinese do not burn their dollars, then they (or other foreigners with whom the Chinese deal) must use these dollars either to buy American products or to invest in the U.S. economy (or both).  To the extent that foreigners buy our products, by your reckoning they must be "rebuilding" America.  To the extent that foreigners invest in America, they are – what?  Do such investments harm America?  Does foreign investment in America not help to "rebuild" America?  If not, why not?

I'm interested to know your answers.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA 22030

Virtue and Dignity: The Motion Picture

Earlier today I applauded the talk that Deirdre McCloskey delivered yesterday afternoon at GMU.  Here's a video of her talk.  (HT Cord Blomquist)

Psst

The latest EconTalk is Arnold Kling on what he calls PSST, Patterns of Sustainable Specialization and Trade. It's a conversation about how to think about macroeconomics.

Here is an example of applying Arnold's concept that we discuss briefly in the podcast. Suppose there is an increase in the desire to stay home and cook more rather than eating out. Arnold thinks of this as an increase in non-market activity and a decrease in specialization–I'm cooking more for myself–some restaurants that specialized in cooking for others will now go out of business. A whole set of adjustments take place throughout the economy. Arnold is contrasting this with the Keynesian idea that this will lead to  a reduction in aggregate demand. So Arnold sees the challenge of this change in behavior as being one where people who were once in the restaurant business now have to find something else to specialize in–they have to become part of a new pattern of specialization and trade.

But it is not just there is less specialization. In fact in some sense there is just as much market activity but its nature has changed. So there will be fewer restaurants but more pots and pans sold, more cookbooks published, more cooking shows on TV, a wider array of ingredients in the grocery.

These kinds of changes take place all the time, without major disruption. It's creative destruction. Hayek sees the price system as the mechanism that allows these changes to take place with relative seamlessness. Here is how I described it (slightly edited) in my book, The Price of Everything (which is only $8.99 (whoo-hoo!) at Amazon right now):

Just to take one example, million of Americans now try to lead healthier lives than they did in the past. They decide to exercise more and eat better. Think of the enormous range of things that have to happen and that do happen to let those plans and dreams come to reality. New kinds of food in the grocery store. New kinds of grocery stores. New kinds of running shoes and racquetball shoes and walking shoes. New kinds of clothes made of new materials that make sweating more pleasant. New kinds of exercise machines. Videos to go with them.

New kinds of bikes. More tennis rackets. New kinds of tennis rackets. People to make all those things and work in all those places making and selling and explaining to people about the new choices that are available. An enormous army of workers and creators springs into action. The plans of all the people who want to eat better and exercise more got matched with the plans of all the entrepreneurs who strove to make money meeting those desires.

Who made sure that those dreams and desires, those plans and actions didn't conflict with each other or with the thousands of other dreams and plans underway at the same time?

All the resources—the workers and the raw materials—that had to be mobilized to make sure that life elsewhere in the economy wasn't hopelessly disrupted? Who settled those disputes over how much land would be devoted to organic food and how much to junk food? Because there's more and better junk food, too. What a world we live in. You can get organic milk and four kinds of mesquite flavored potato chips! The dreams of a healthier America didn't shut down the dreams of those who wanted to be couch potatoes playing video games. Some biochemists even figured out ways to reduce the cholesterol of the coach potatoes so they wouldn't pay too high a price for not exercising. Who made sure there were enough biochemists and enough engineers working on the lasers? Who made sure that Nike would find all the rubber and fabric and workers it needed to cushion the feet of all those runners while other shoemakers were looking for materials and workers because a TV show made higher heels all the rage?

Who weaves together all the plans to make sure that they work in parallel  rather than producing conflict? Who is the planner in charge?

There isn't one. Each of us takes the unique strands of our hopes and dreams and adds them to everyone else's. Yet, somehow they all fit together and the tapestry of our lives just gets more interesting and varied and human.

But how do our choices manage to fit together without a weaver of dreams? How is that some of us can become vegetarians or exercise fanatics or couch potatoes or take up the guitar or become gardeners or engineers or teachers and all the products and tools we need are out there waiting for us without us having to let anyone know what we're going to choose? How is that 100 million Chinese can leave the countryside and their kids start using pencils and bicycles but there's still graphite for tennis rackets? Who sends out the memo to put all the effort into motion to make sure all the dreams can coexist so peacefully? What is the glue that holds everything together on its own without anyone being in charge.

The prices. Our choices fit together because the price of everything can adjust and steer resources and knowledge throughout the economy. We only see our own little corner of the tapestry. No one can see the whole thing. But the genius of the system is that our little corner is all we need to see. No one has to know the price of everything even though the price of everything is always adjusting in response to all the changes going on in our incredibly dynamic economy. The graphite owner can focus on the price of graphite and spend the rest of the time learning about how to find cheaper ways of getting graphite out of the ground. And because no one has to know the price of everything, our knowledge grows, our world get better and no one has to master all the dreams going all at once to make sure they somehow fit together.

So why all of a sudden is there so much disharmony, so much unemployment? Why don't the pieces fit together any more? Is it because the prices aren't doing their job? Why not? Or is it because a non-organic change–an artificially induced increase in the demand for houses–causes a different set of actions and reactions? Or is it because the increase in demand for houses was so sharp and the increase in demand (and wages) for carpenters and electricians was so sharp, that they're having trouble dealing with the fact that those $100,000 a year jobs are gone for at least five to ten years and maybe never coming back. So they have to figure out the best use of the skills that they have (what Arnold calls figuring out their comparative advantage) and this isn't easy to do. It might mean moving or retraining. But it most likely means facing a new reality you rather not face where you earn a lot less than you did just yesterday. Who is eager to validate that change? So you wait a while before committing to being in a different part of the economic tapestry.

Thinking about the micro of macro like this may help us understand the jobless recoveries of recent recessions. Could it be that it is not the recovery that is so different but the boom and bust that preceded it? Certainly in the last two recessions, this one and the one in 2001, sectors of the economy boomed with great wage increases and then busted–suddenly a lot of jobs that once paid a lot of money (tech sector in 2001, housing in this one), are very scarce. And when times are good, they are very good for some sectors but not others. And when they are bad, they are mostly bad for some sectors and not others. Could there be more heterogeneity in the expansions and contractions that makes it harder for people to figure out and decide where they should work next?

Deirdre's Virtue and Dignity

One of today's most creative, insightful, and productive scholars (it does her an injustice to label her simply as an "economic historian" or even as an "economist"), Deirdre McCloskey, spoke yesterday at George Mason University.  As always, listening to Deirdre was a thrilling intellectual adventure.  She (quite justifiably) plugged her two latest books. (Here and here.)

Among the many things I learned is that, until the industrial revolution, global per-capita income averaged about $3 per day (presumably in 2010 dollars).  Today it averages about $30 per day: a ten-fold increase in access to goods and services.  In the U.S., daily per-capita income is now about $125 per day (and, adjusting for improvements in quality, says Deirdre, closer to $300 per day).

Deirdre also said that she prefers the term "innovation economy" to "capitalism."  The reason is that accumulation of capital – either physical or human or both – is not the chief cause of the high standard of living in any 'capitalist' economy.  The chief cause, instead, is innovation – creative minds free to innovate.  For example.

A very Julian-Simonesque point!

In order to meet my Principles of Microeconomics class last night I had to leave Deirdre's talk just after the Q&A began, so I'm sure that I missed many more insights.

At Least Ackerman Admits that the Actual Words of the Constitution Don't Allow for Such Welfare-State Legislation

Here's a letter to the New York Times:

Perhaps Laurence Tribe is correct that Obamacare doesn't violate the Constitution as that document has been interpreted since the New Deal ("On Health Care, Justice Will Prevail," Feb. 8).  It is, however, precisely this expansive interpretation that is now at issue.

No less a left-liberal legal lion than Yale's Bruce Ackerman admits that the Constitution had to be amended in order for New Deal policies to pass constitutional muster.  But this 'amendment' was not done through Article V procedures (as explicitly provided in the Constitution); rather it was done by a Supreme Court bullied by a U.S. President.  Here's Ackerman: "Roosevelt and the New Deal Congress had not chosen to codify their new constitutional principles by enacting a few formal amendments, of the sort contemplated by Article Five.  Instead, the President and Congress left it to the Justices themselves to codify the New Deal revolution in a series of transformative judicial opinions, threatening to pack the Court unless it accepted this novel constitutional responsibility."*

Prof. Ackerman regards this historical event as being a legitimate instance of constitutional amendment.  Many other Americans – rubes that we might be for insisting that the actual words of the Constitution itself be taken literally – disagree.

Sincerely,

Donald J. Boudreaux

* Bruce Ackerman, We the People: Foundations (Cambridge: Belknap Press of Harvard University, 1991), p. 119.

In his 1796 Farewell Address, George Washington – who presided over the 1787 Constitutional Convention in Philadelphia – warned:

If in the opinion of the People the distribution or modification of the Constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates.  But let there be no change by usurpation; for though this, in one instance, may be the instrument of good, it is the customary weapon by which free governments are destroyed.
(HT Jim Agresti)

Vox Populi….

Here's a letter to the Baltimore Sun:

Applauding government-issued dietary recommendations, Peggy Yen insists that "people need simple guidelines for choosing the food they eat" (Letters, Feb. 9).

If people are too dimwitted to choose on their own the foods they eat, how can they possibly be trusted to choose on their own the persons who represent them in government?

The evidence does indeed suggest that Americans too often choose as their elected representatives greasy, pork-laden, and processed hot dogs who offer only empty calories as they clog the arteries of commerce.

Sincerely,

Donald J. Boudreaux

On the Reported Unemployment Rate

Over at the New York Times' 'Room for Debate' feature, Tyler Cowen today writes that

The American job market is also spectacularly bad, with the high measured rate of unemployment concealing an even higher rate of underemployment or simple withdrawal from the labor force.

In a very different context, the Denver Post's brilliant columnist David Harsanyi today mentions, in an otherwise superb essay,

the putrid job situation — kept at an illusory 9 percent through an exodus from the job marketplace.

I agree that America's job market today stinks.  But I am uneasy by this talk of the current unemployment rate being an underestimate of the true level of unemployment.

At some level this claim that the reported rate is an underestimate might be defensible.  But be careful before jumping to this conclusion.  Here are some questions:

- Is today's 9.0 percent official rate of unemployment not comparable to past times in U.S. history when the official rate of unemployment was at or near 9.0 percent?

- Does a high official rate of unemployment underestimate 'true' unemployment only when the unemployment rate has been high for some number of months?  For any given reported official rate of unemployment (such as January 2011′s 9.0 percent), does the extent of underestimation increase if the reported rate has been rising over the past few months, and decrease if the reported rate has been falling?

- Isn't it true that nearly every adult between the ages of 16 and 96 who is not in the job market during normal, and even booming, economic times voluntarily keeps himself or herself out of that market because he or she is sufficiently discouraged at the prospect of finding a job that would pay well enough to warrant searching for work and, if finding it, actually working in the market?  (The stay-at-home young and healthy wife of a millionaire professional sports star would surely enter the job market if she believed that she might land a job that pays her $100,000 per hour.)  Is there any non-arbitrary way to distinguish 'discouraged' workers during normal times from 'discouraged' workers during recessions?

- Most importantly, when (by whatever measure) the jobs-picture brightens, will the reported unemployment rates during those 'brightening' months over-estimate the level of unemployment as formerly discouraged people become sufficiently encouraged to re-enter the job market in search of employment?

I certainly do not mean to suggest that the official reported unemployment rate is perfect or unable to be improved.  But it strikes me as too 'iffy' – and sometimes even too politically convenient – to conclude that the 'true' rate of unemployment is ever anything other than the official reported rate.  That official rate, for all of its faults, is the one we've used in the U.S. for years and we either ditch it for a new and better method of measurement or we accept the reported rate as is – again, despite its known imperfections.