Russell Roberts's Blog, page 1483

The Illogic of Mercantilism, Case #56,867

From Mark Perry, through Steve Landsburg, Henry Hazlitt reminds us that to discourage imports is to discourage exports, and vice-versa.  Another name for this insight is the Lerner Symmetry Theorem (named after the late economist Abba Lerner) – as explained here by Doug Irwin.

A Proposal in the Public Interest

One of the marks of a good economist is to recognize that money is not at all all that matters.  Incentives come in lots of different forms – often in monetary forms, but often (perhaps even more often) in non-monetary forms.

The man who diets and goes to the gym regularly might well do so in order to make himself more attractive to potential mates.  The benefit isn't monetary, and the cost isn't exclusively, or even chiefly, monetary.  But there's nevertheless a real cost-benefit calculation going on in that guy's mind.  Raise the cost (say, he injures a pectoral muscle) or lower the benefits (say, he meets a fetchin' babe with a fetish for flabby dudes), and he'll spend less time at the gym.  And vice-versa.

Another mark of a good economist is to be skeptical of stated intentions.  Talk is cheap.  So if Jones professes his great love of humanity, the economist pays little heed.  (Old joke: Economist and non-economist are strolling in Manhattan.  When they pass Carnegie Hall, the non-economist says wistfully to the economist, "You know, I've always wanted to learn to play the piano."  The economist replies "obviously not.")

Which brings me to the main point of this post, namely, a proposal to screen for truly public-spirited public servants to seek and hold high elected government office.

We are constantly told that this long-serving senator or that 19th-term representative has devoted his or her life to "public service" – implying that he or she has made genuine sacrifices in order to work for the betterment of society.  Politicians are routinely called "public servants."

But how do we know that they – more than the ordinary mortals who vote them into office – truly put the welfare of strangers above their own welfare?  Of course, they say they do so.  But talk is cheap.

So here's my proposal: require that everyone seeking high-level elective government office do so anonymously.

Each candidate for office gets a new, sterile name – something that reads like an abbreviated VIN for a automobile.  For example: 8ANJf9.  In fact, call it a PIN – "politician identification number."

Each candidate, successful or no, will for the rest of his or her days and into the future mists of history be known to the public only by his or her PIN.  Candidates' and elected-officials' faces will never be seen by the public; they will address the public from behind curtains (both real and virtual), and their voices will be electronically modified so that not even their mothers, spouses, or household pets will recognize their voices.

History will know them – the good, the bad, the indifferent – only by their PINs.

They will also be required, during their time in office, to live in spartan government housing, and they will be paid modestly, say, 80 percent of the U.S. median household income.

My proposal, if adopted, would screen for truly public-spirited people to serve in elected office.  When, say, 8ANJf9, proclaims his or her (we'll not know the person's sex) devotion to the greater good and the public weal, that proclamation will be believable.

Of course, adoption of my proposal is not without its downsides – but yet another hallmark of the economic way of thinking is to recognize the ubiquity of trade-offs.

All the tawdry 'glory' of elected office will be stripped away, so that such offices are no longer sought by fame-seeking megalomaniacs.

….

This proposal stems from a conversation that my buddy Andy Morriss and I had in July 2000 in the jungle of Tikal, Guatemala.  Hearing a tour-guide there refer to ancient Mayan rulers as "King 1," "King 2," "King 3," and so on – personal information on these long-dead Ozymandiases was lost – Andy immediately saw the promise of making genuine public servants anonymous.

Some Links

The Kauffman Foundation's Brink Lindsey reviews Tyler's new e-book, The Great Stagnation.  As does Scott Sumner.  And as does Arnold Kling.

Pop quiz: In which year since 1999 did the U.S. "lose" the greatest number of manufacturing jobs?  Mark Perry has the answer.

Matt Ridley has convinced me to read, for the first time in my life, a book on chemistry.

Steve Landsburg has a different take on macroeconomics than does Paul Krugman.

And, speaking of Steve, he rightly laments the xenophobia that infects both major U.S. political parties.

A Quiz

Here's a quiz.  For each of the five following passages, guess the name of the economist who penned it.  (Answers below)

1. For the world economy as a whole – and especially for poorer nations – growing trade between high-wage and low-wage countries is a very good thing.  Above all, it offers backward economies their best hope of moving up the income ladder.  But for American workers the story is much less positive.  In fact, it's hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country.

.

2. The idea that Third World competition threatens living standards in advanced countries seems straightforward. Suppose that somebody has learned to do something that used to be my exclusive specialty. Maybe he or she isn't quite as good at it as I am but is willing to work for a fraction of my wage.  Isn't it obvious that I am either going to have to accept a lower standard of living or be out of a job?  That, in essence, is the view of those who fear that Western wage rates must fall as the Third World develops.

But this story is completely misleading.  When world productivity rises (as it does when Third World countries converge on First World productivity), average world living standards must rise: after all, the extra output must go somewhere.  This by itself presumes that higher Third World productivity will be reflected in higher Third World wages, not lower First World incomes.  Another way to look at it is to notice that in a national economy, producers and consumers are the same people; foreign competitors who cut prices may lower the wage I receive, but they also raise the purchasing power of whatever I earn.  There is no reason to expect the adverse effect to predominate.

.

3. If you think in terms of models, however, you know that the case for free trade is profound, but also conditional: it depends, among other things, on having sufficient policy levers to achieve more or less full employment simultaneously with free trade.

.

4. [T]he level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect.  Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.

.

5. For the bulk of our economics students, our objective should be to equip them to respond intelligently to popular discussion of economic issues.  A lot of that discussion will be about international trade, so international trade should be an important part of the curriculum.What is crucial, however, is to understand that the level of public discussion is extremely primitive. Indeed, it has sunk so low that people who repeat silly clich6s often imagine themselves to be sophisticated.  That means that our courses need to drive home as clearly as possible the basics.  Offer curves and Rybczinski effects are lovely things.  What most students need to be prepared for, however, is a world in which TV "experts," best-selling authors, and $30,000-a-day consultants do not understand budget constraints, let alone comparative advantage.

Answers: 1. 2. 3. 4. 5.

Philistine… Or Constitutionalist?

Here's a letter to the New York Times:

Peter Samton says that GOP efforts to eliminate the National Endowments for the Arts and the Humanities, as well as the Corporation for Public Broadcasting, expose that party's "ignorance in matters cultural" (Letters, Jan. 28).

Suppose a radical-right Congress manages to create a National Endowment for Religions as well as a Corporation for Public Worship.  Democrats would certainly – and rightly – work to eliminate such programs on grounds that these are dangerous intrusions by government into matters that government has no business meddling in, as well as an unconstitutional use of taxpayer funds.  And surely Democrats would vigorously – and, again, rightly – point out that their opposition to these government programs does not imply that Democrats oppose religion or that they are "ignorant in matters spiritual."

Why are GOP efforts to get government out of the arts any different?  To object to Uncle Sam subsidizing the arts – particularly when there's no constitutional provision authorizing such funding – no more implies that one is a knuckle-dragging oaf than would efforts to get government out of religion imply that one is a militant atheist intent on denying everyone access to spiritual texts and worship services.

Sincerely,

Donald J. Boudreaux

International Trade Is Not Properly Analogized to Sports or to War

Here's a letter to the Washington Post:

E.J. Dionne interprets Pres. Obama's State of the Union summons for government to 'invest' more in "our free-enterprise system" as the president telling Americans that "without smart and active government, China will leave us in the dust" ("Obama finds a new angle to reach old goals," Jan. 27).

This message is surely the one that Mr. Obama meant to convey.  But the message is misleading, based as it is on the popular fallacies that countries are like corporations, and that international trade is akin to a sporting event in which there are winners and losers.

As explained by a Nobel-laureate economist who wrote an entire book denouncing the notion that when countries trade with each other they compete against each other, "One of the most popular enduring misconceptions of practical men is that countries are in competition with each other in the same way that companies in the same business are in competition….  [I]nternational trade is not about competition, it is about mutually beneficial exchange."

Are these the words of "conservative" economist Milton Friedman?  No.  F.A. Hayek?  Again, no.  They are the words of arch-"Progressive" Paul Krugman.*

Sincerely,

Donald J. Boudreaux

*Paul Krugman, "What Do Undergrads Need to Know about Trade?" American Economic Review, May 1993; reprinted in Paul Krugman, Pop Internationalism (Cambridge, MA: MIT Press, 1996), pp. 117-125.  The quotation in the letter is on page 120.

Reactions to Last Night's State of the Union Address

Yours truly in the Christian Science Monitor.  (I don't want government to be pro-business; I want it to be pro-market.)

Veronique de Rugy and Nick Gillespie at reason.com

Adam Bitely on the political theater of it all

Ryan Young on Barack W. Bush

And, in this video, a host of Cato scholars, including Sallie James and John Samples.

Some Links

Steve Horwitz exposes the faulty method used by organizations intent on showing that "the poor" in America have stagnated economically over the past few decades.

Bill Easterly uses a truly inspired analogy to explain the importance of Hayek's insight about dispersed knowledge (and, I would add, also of the institution of private property).

In my most-recent column in the Pittsburgh Tribune-Review, I expose my inner nerdiness.

Here, in French, is a report on a poll that finds that 33 percent of the French want to abandon capitalism, while the number of Chinese who share this opinion is 3 percent.  As for Americans, About Americans, only 39 percent of us regard "the development of international trade" to be good.  This figure is the lowest among all countries surveyed.  (HT Radu Nechita)

Julian Simon would not be surprised.  (HT Josh Mccamon)

I have great colleagues – not least of whom is Bryan Caplan!

Regime Uncertainty

In Wednesday's Investor's Business Daily, Bob Higgs offer his explanation for why unemployment in America remains obnoxiously high.  I find his explanation to be compelling.

Stagnation or mismeasurement?

Tyler has a new mini-book out on stagnation where he accepts the idea that median income has been growing very slowly for the last 40 years relative to earlier times. One challenge to this claim is that prices are mismeasured. Tyler, of course, understands that and offers this response (HT: Will Wilkinson):

One might think that the CPI is skewed and there are reasonable arguments to be made in this direction.  But the CPI will be most skewed to underappreciate progress when truly new goods and services are being introduced into the marketplace or spreading to new regions.  And that is (roughly) the 1870-1950 period, more than any other time.  In other words, if you account for CPI bias, the slowdown in median income growth — the difference — is probably largerthan the numbers make it appear, even though in absolute terms both growth rates will be higher than measured.

It is not just a question of the number of new goods and services–it is the pace of innovation  within product categories and how much each of these makes it hard to measure prices with any accuracy. So it is not just that we now have televisions that we didn't have before. It's the speed at which new television models are introduced and the pace of the improvement of those new models. The 1946-1973 period surely introduced some new products. But my perception is that the pace of innovation was quite slow relative to today. As I wrote on September 6, 2007:

The iPod will be six years old next month. The newly released iPod Classic with 160 GB of memory is $50 cheaper than the original iPod, holds 40 TIMES more songs and also plays color videos and displays photos. It is smaller, lighter and has a better battery. I wonder how the BLS takes account of the quality differences when measuring the price index and inflation.

That 160 GB iPod is now $249. I assume it's smaller and weighs less and has longer battery life. But that's a pretty easy price change to measure. How do you deal with the existence of the nano and the iTouch? Much tougher. I have a feeling this kind of within-product innovation is much harder for the BLS to quantify and is much more prevalent in recent times than earlier ones.

To understand the challenge of measuring CPI accurately when there is a high rate of innovation, read my earlier posts here and here. The expert on this issue is Mark Bils. Some of his papers on these issues are here.