Russell Roberts's Blog, page 1488

Open Letter to Donald Trump

17 January 2011

Mr. Donald Trump

NYC

Dear Mr. Trump:

A friend sent me a link to your interview on a recent Michael Savage radio show.  You're angry at China because Americans "no longer make things."  You are mistaken: American manufacturing output is now near an all-time high, and America remains the number one manufacturer in the world.

It's true that manufacturing jobs are decreasing, but rather than blame the Chinese, your anger would be better targeted (if not better justified) if you blamed American innovators and even American manufacturing workers.  Productivity per-worker in U.S. manufacturing plants is so high today because modern technology and training permits a small handful of workers to do what in the past took a horde of workers to do.

The greatest competition for Americans seeking manufacturing jobs comes not from the Chinese or from other foreign workers; it comes from other Americans – and the technology they work with – who produce so much per worker that relatively few manufacturing workers are needed today.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA 22030

(HT Reuvain Borchardt)

Entertainers, Not Reporters

Here's a letter to CNNMoney.com:

Senior Writer Steve Hargreaves writes that "By buying so many Chinese goods, the country is literally sending its dollars abroad.  The Chinese then use those dollars to buy U.S. government bonds.  While that allows the United States to continue borrowing, it's bad because taxpayers must pay interest on those loans"  ("Five Chinese trade tricks," Jan. 17).

Ummm…. Uncle Sam ran budget deficits long before the Chinese starting buying U.S. treasuries.  And it's a bizarre and unflattering view of Congress in which that body is somehow lured into fiscal imprudence simply because Americans import more from the Chinese than the Chinese import from Americans.

Finally, even if Uncle Sam borrowed every cent of his debt from Americans, it would still be true that "taxpayers must pay interest on those loans."  Chinese creditors are not unique in demanding interest payments on the funds that they lend.

Sincerely,

Donald J. Boudreaux

(HT to Clemson University economist Bobby McCormick for inspiring, via a private e-mail, the title of this post.)

Why we need government

The U.S. Government Printing Office has a web site to help kids understand our country. There are different sections for different age groups and grades in school. For K-2, here is how the site explains the role of government (HT: Gregory Adams):

Why do we need a government? Imagine what your school would be like if no one was in charge. Each class would make its own rules. Who gets to use the gym if two classes want to use it at the same time? Who would clean the classrooms? Who decides if you learn about Mars or play kickball? Sounds confusing, right?

This is why schools have people who are in charge, such as the principal, administrators, teachers, and staff. Our nation has people who are in charge and they make up the government.

Hmmm. Not quite what I'd say. Feel free to take a shot at a better explanation in the comments. Remember, this is for kids who are between the ages of five and seven years old.

Human creativity

I love it when users discover applications for a product that weren't intended by the designer. Here's a good one that was highlighted this past week in the New York Times.

[image error]This cheese grater was originally designed as a woodworking tool but the manufacturer discovered that people were using them to grate cheese and zest lemons.

The other example I came across this week, is the IKEA pencil–a pencil that IKEA gives away, apparently. It is proving quite useful in surgery. From the BMJ:

As popular as these pencils are, we were still a little surprised to be handed one halfway through a surgical case. The use of a pencil to mark osteotomy cuts in craniofacial and maxillofacial surgery is well established, proving superior to methylene, Bonney's blue, and felt tipped skin markers that struggle to transfer an ink mark to bone, or are washed away by irrigation or tissue fluids.4 5Sterilisation, originally achieved with 18 hours of dry heat,6 is now performed by autoclaving, making a pocketful of IKEA pencils from one shopping visit last for many months­­—important in the current financial climate. The only problem is that on repeated sterilisation even the hardiest of pencil splits. Ours proceeded to extrude its graphite core before it was even removed from the protective wrapper. We have solved this problem by wrapping silicon cuffs around the pencil—maybe we could suggest this to the designers at IKEA?

Irwin on Chang

My generation's greatest trade economist, Doug Irwin, reviewed Ha-Joon Chang's 2002 book Kicking Away the Ladder. Doug's review shows just how shallow protectionists' arguments can be.

Kling on Galbraith

Here's EconLog's Arnold Kling on Jamie Galbraith's notion to encourage early retirement as a means of increasing employment and helping the economy:

The Washington Post reports that some on the left want to see older workers encouraged to retire, to make room for young workers. If you believe in AS-AD [aggregate supply - aggregate demand], I suppose that makes sense. If you believe in PSST [patterns of sustainable specialization and trade] (or anything like elementary economics), it's nuts. From a PSST point of view, taking away market activity from some people will reduce, not increase, the market economic activity of others. I should point out that this applies to sending home illegal immigrants–from a PSST point of view I would expect this to reduce employment of the native population, not increase it.

On "Tax Expenditures"

Commenting here, egrass (a neighbor and personal friend of mine, by the way) equates subsidies with failure to tax – or, at least, with failure to tax equally all parties who are identified by some reasonable criteria as being equivalent to each other.

I do not.

And unlike egrass, I also do not believe that such an issue can be resolved exclusively through science and logic and facts and "math."  Some philosophy is inevitably required.

Here's my philosophy – admittedly one whose correctness cannot be observed or proven mathematically: If A earns $100, every cent belongs to him.  If G takes some of A's money – "taxes" A – that action is morally illegitimate (even if – a big if – it turns out, by some criteria that even I agree with, to produce beneficial economic growth).  If G stops taking A's money (or takes only less of it), G does not give anything to A.  G does not subsidize A.

If G taxes A and B, the same analysis holds.

If G taxes A but (for whatever reason) does not tax B, G does not subsidize B.

Given that in this world we are cursed with the necessity to suffer the existence of government, it is certainly the case that some patterns of taxation are morally better – or "fairer" – than others.  It is also certainly the case that some patterns of taxation have worse consequences on the private economy than do others.

As a practical matter, I believe that – for as long as the curse of taxation befalls us – it's better to have a wider tax base and lower tax rates.  That is, I would gladly eliminate tax deductions in exchange for lower tax rates.  I would do so chiefly because of the better economic consequences that would result.  It's not clear to me how the ethical consequences play out, given the complexity of how people have adjusted their behaviors over time to the current tax code and the complexity of figuring out who benefits, and by how much, from government's use of its revenues.

But although I oppose lots of deductions on economic grounds, I do not – unlike egrass – believe them to be subsidies.  These deductions might be unwise; they might be unfair; they might be economically distorting and harmful.  (Although, it is at least equally appropriate to say here that the unfairness, distortion, and harm are caused, not by the deductions, but by the taxes actually levied.)  But G deciding to confiscate less of B's money than G confiscates of A's money is not G giving anything to B.  A certainly has a cause to complain – but not that B's pocket is insufficiently picked, but that A's pocket is too heavily picked.

It's not – nor can it possibly be – exclusively a matter of logic or math or facts that determine one's view of where ownership of a piece of wealth originally lies.  I believe that it lies with the person who produces it, earns it.  egrass seems to believe that it's at least as legitimate to regard B's money as originally belonging to the state or 'society' as to regard it belonging originally to B.

There is no formula or mathematics or logic that can prove my philosophy of ownership to be right or wrong; likewise for egrass's position.  And the fact that the government has it within its power to tax B more heavily – say, by taking away B's deductions – does not render my philosophy of ownership invalid.

I point out, for the record, that what I above call "my philosophy of ownership" is obviously nothing that I've devised.  It's the same philosophy of ownership that traces back at least to John Locke and has motivated the great classical liberal tradition.

The Keynesian Diversion II

When Jim DeLong e-mailed to me this link to this ungated edition of Henry Hazlitt's The Critics of Keynesian Economics (my own hard copy of which I lost long ago), he said that he especially likes the essay by David McCord Wright.  I just re-read Wright's essay and concur with Jim's favorable assessment of it (save for Wright's attributing high British unemployment in the 1920s to that country's inadequate technology without mentioning Churchill's calamitous 1925 decision to return the British pound to the gold standard at pre-WWI prices).

These paragraphs from Wright's essay are key:

Characteristically, Keynes deferred a statement of the basic assumptions of of his fundamental model until the eighteenth chapter of his book, where they are often overlooked.  Yet everything in his model depends upon these assumptions, and I am sure that if their limited nature were more widely recognized, Keynes' conclusion would have far less prestige.  The crucial passage runs as follows:

"We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer . . . the social structure including the forces. . . which determine the distribution of the national income.  This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them" (italics supplied [by Wright]).

This passage (some of the more technical sentences are omitted) assumes in effect that (i) there is no technical change or invention, (ii) there is no change in taste, (iii) there is no change in population or resources, and (iv) there are no changes in the preferences of the population between work and goods, on the one hand, and leisure, on the other.  These assumptions, it will be seen, in effect "freeze" the system, and practically every dynamic element of capitalist civilization is removed.  Of course, as he explains, Keynes did not mean that these forces were always lacking in reality.  But what he did mean, and the point cannot be too often stressed, is that in the basic model on which his system rests, virtually all the dynamic social forces are omitted.

Such assumptions assume away much (most?) of the very things that drive economies – drive them not only to grow (or shrink) over the long-run, but to escape (or not) recessions.

Consider especially the first three assumptions mentioned by Keynes:

We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique….

To take as given especially the existing "quality and quantity of available equipment [and] the existing technique" is to ignore possible changes in the capital structure.  Keynes assumed away any possibility for unexpectedly rising inventories and other signs of consumers' change in demand (including changes in their demand to hold money) to prompt entrepreneurs and investors to respond with actions that lengthen the time-structure of production.  Keynes assumed away the possibility that machines and other capital goods can be redeployed, through changes in technique, to produce familiar goods and services differently, or to produce entirely new goods and services.

In short, as Leland Yeager suggests in the passage highlighted here, Keynes's assumed away most of the adjustments to economic discoordination that actually take place in economies – most of the stuff that are the object of 'microeconomic' analysis.  Keynes was then left – not surprisingly – with deficient aggregate demand as the overwhelming culprit that must be solved.

Tim Worstall says it best: "In the long run, it's all microeconomics."

Jobs Are Not Pre-existing Boxes

Here's a letter to the editor of Foreign Policy:

Lamenting America's currently high rate of unemployment, University of Texas economist James Galbraith writes that "the retirement age is too high" ("Unconventional Wisdom," Jan./Feb. 2011).  He continues: "common sense suggests we should make some decisions about who should have the first crack: older people, who have already worked three or four decades at hard jobs?  Or younger people, many just out of school, with fresh skills and ambitions?"

Great idea!  The 59-year-old Prof. Galbraith can put his money where his theory is and retire immediately.  I know several newly minted PhD economists from George Mason University who, just out of school with fresh skills and ambitions, would love a full-time faculty position at UT-Austin.  By retiring even though he still wishes to continue teaching and doing research – and even though his talents on these fronts haven't declined – Prof. Galbraith will do his part to help unemployed workers.  If Prof. Galbraith's theory of employment is correct, UT-Austin will be no worse off, and the gains to the young economist hired in his place, as well as the gains to the economy at large, will outweigh any loss suffered by Prof. Galbraith.

Sincerely,

Donald J. Boudreaux

Reading Galbraith's essay reminds me (arrogantly, I know) of this long-ago column written for the Pittsburgh Tribune-Review.

The Intellectual Challenges of Protectionism

Mr. Sam Williford

Economy In Crisis blog

Dear Mr. Williford:

In today's blog post entitled "'America's Got Product' Works to Stem Import Invasion" you advise Americans to "Buy American."  In that post you favorably quote one Chris Kilcullen who warns that "The more money that leaves the country, the less money there is to earn in this country."

Well now….

Immediately above your post is a banner ad from Seven Islands/Sept-iles, a region in Quebec, Canada.  That region is advertising on your site – and I quote – "Steel Mill Needed in Booming Strategically Located Canadian Port City," and "Millions of Tons of Iron Ore Shipped Out Yearly," and my personal favorite "Land, Government Subsidies, Low Energy Cost, and Ideal for Lowest Cost Manufacturing and Distribution."

Your "Buy American" website is financed in part by U.S. dollars transferred to your organization from Canadians in exchange for advertising space on your site.  So what are we to make of Mr. Kilcullen's warning that dollars that leave America are no longer available to be earned in America?

More fundamentally, aren't you a tad bit hypocritical to publicly fret and wail as you do about the loss of manufacturing and jobs in the U.S. on a venue supported by advertising dollars spent by a foreign government urging American producers to relocate their operations outside of the U.S.?

Sincerely,

Donald J. Boudreaux