Russell Roberts's Blog, page 1493

An Open Letter To Erin Ennis

Ms. Erin Ennis

U.S.-China Business Council

Washington, DC

Dear Ms. Ennis:

Thanks for your invitation to a speech to be delivered next Thursday at the Capital Hilton by U.S. Commerce secretary Gary Locke.  I must decline.

Mr. Locke's address is sure to get rolling with harmless rhetoric about the promise of U.S.-Chinese friendship and of more trade between our two nations.  This address, however, will just as surely run off the rails with Mr. Locke identifying increased U.S. exports to – rather than imports from – China as the benefit we Americans will enjoy because of his and Pres. Obama's intrepid leadership.  And the speech will become a verbal train wreck when Mr. Locke complains, as he certainly will, about the allegedly undervalued yuan and other Beijing policies that Uncle Sam deems to be "unfair" – policies that, Mr. Locke will promise, the Obama administration shall unhesitatingly "punish" with "tough" trade sanctions.

Such proclamations are as wrong as they are predictable.

A speech that I would spend my time to hear, in contrast, is a very short one; it's a speech in which a high-ranking official in the U.S. government would simply and approvingly quote British Prime Minister Robert Peel's 1843 statement to the House of Commons explaining his decision to support a repeal of the British tariffs known as "corn laws": "I am bound to say that it is our interest to buy cheap, whether other countries will buy cheap or no."  Full stop.

Peel's 21 words contain vastly more wisdom (and political courage) than the thousands of words that Mr. Locke will inflict upon your invited audience.

Sincerely,

Donald J. Boudreaux

Does the Constitution Matter?

David Harsanyi gets it exactly right.

Answer Me This

Here's a letter to the Washington Post:

Harold Meyerson asserts that 20th-century America was blessed by an "equilibrium among production, wages and purchasing power – the equilibrium that Henry Ford famously recognized when he upped his workers' pay to an unheard-of $5 a day in 1913 so they could afford to buy the cars they made ("Corporate America, paving a downward economic slide," Jan. 5).

This popular account of Ford's pay raise is a myth.  Ford raised wages in order to attract and keep good workers; he was obliged to do so because of competition for labor.*

As for the alleged "equilibrium" that Mr. Meyerson mentions, to understand that it is fanciful requires only that one ask the following question: would Boeing remain solvent if it raised its workers' wages so that they could afford to buy the commercial airliners they make?

Sincerely,

Donald J. Boudreaux

* See, for example, the outstanding Tim Worstall.

Limited Powers

The two lead letters in the Jan. 5, 2011 edition of the Wall Street Journal convey important historical information about the U.S. Constitution.  Here are those letters:

Regarding "ObamaCare and the General Welfare Clause" (op-ed, Dec. 27) by Randy E. Barnett and David G. Oedel: The wonder is that this key statement could need any help considering that 221 years ago James Madison clearly identified some common misunderstandings of the general welfare clause and explained what the Founders meant, clearly, thoughtfully, and I'm sure he felt finally, when in Federalist Number 41 he wrote: "Some . . . have grounded a very fierce attack against the Constitution, on the language in which it is defined. It has been urged and echoed, that the [Constitution's] power '. . . to provide for the common Defense and general Welfare of the United States,' amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare.

"Had no other enumeration or definition of the powers of the Congress been found in the Constitution than the general expressions just cited, the authors of the objection might have had some color for it. . . . But what color can the objection have, when a specification of the objects alluded to by these general terms immediately follows, and is not even separated by a longer pause than a semicolon?"

And following that semicolon is a list of 17 other congressional powers, from "borrow money on the credit of the United States" to "make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers," but not a word about health care, environmental protection, education, housing, etc.

Too bad the father of the Constitution did not anticipate future misunderstandings of the Commerce Clause.

Arnold H. Nelson

Chicago

In an 1817 letter to Albert Gallatin, Thomas Jefferson said "that Congress had not unlimited powers . . . to provide for the general welfare, but were restrained to those specifically enumerated; and that, as it was never meant they should provide for that welfare but by the exercise of the enumerated powers."

ObamaCare is not unconstitutional due to the misapplication of the descriptive yet nonempowering phrase "general welfare." It is unconstitutional because none of the 18 enumerated powers grants Congress the power to be involved in health care. It's that simple.

J. Michael Hanselman

Frederick, Md.

Ah, the Beauty of Collective Choice

Here's a letter to the programming director at MSNBC:

You feature a Reuters's story reporting that "Most Americans think the United States should raise taxes for the rich to balance the budget, according to a 60 Minutes/Vanity Fair poll released on Monday….  Sixty-one percent of Americans polled would rather see taxes for the wealthy increased as a first step to tackling the deficit, the poll showed.  The next most popular way – chosen by 20 percent – was to cut defense spending ("Poll: Tax the rich to balance the budge," Jan. 3)

In other words, most Americans want lots of government if other Americans pay for it.

Sincerely,

Donald J. Boudreaux

Another possibility, of course, is that this poll was conducted in a biased way.

Applying the Principle

Here's a letter to the Washington Post:

Arguing that the U.S. Constitution is simply a "collection of shrewd political compromises," E.J. Dionne ridicules persons who demand strict adherence to its text ("What a GOP Congress might bring," Jan. 3).

If being a collection of shrewd political compromises justifies a document's text being interpreted loosely, why stop with the Constitution?  Extend this principle to all legislation.  And let's begin with history's greatest collection of shrewd political compromises, the U.S. tax code.

Interpreting that code as a living document, it strikes me that the word "income" is best read as "bunny rabbits."  I will remit to Uncle Sam approximately 25 percent of all bunny rabbits that I acquire this year.  And I will cite Mr. Dionne to defend my interpretation against persons who are so dull-witted as to insist on a wooden, literal interpretation of "income."

Sincerely,

Donald J. Boudreaux

The Test

Suppose the economy does well this year–growth is robust and unemployment falls. What is the reason for the improvement? Will it be because of the natural rebound of an economy after a downturn that has lasted longer than people thought? The impact of the stimulus finally kicking in? The psychological or real impact of extending the Bush tax cuts? The psychological or real impact of the November election results? The steady hand of Obama at the tiller? All of the above? Can any model of the economy pass the test and answer these questions?

The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable. If the economy improves, there will be much talk about the reason. Data and evidence will be trotted out in support of the speaker's viewpoint. But that is not science. We don't have a way of distinguishing between those different theories or of giving them weights to measure their independent contribution.

I'm with Arnold Kling. This is a time for humility. It should be at the heart of our discipline. The people who yell the loudest and with the most certainty are the least trustworthy. And the reason for that goes back to Hayek. We can't measure many of the things we would have to measure to have any reasonable amount of certainty about the chains of connection and causation.

That is not to say that economics has nothing to contribute to the debate or to our understanding. It has something to say. It can rule out some explanations, perhaps. It can help us organize our thinking about the scope of different causes. It might help us understand whether some policies are likely to push us toward recovery or further trouble. It can tell us who wins and who loses from various policies. But if our models of the complex organism called an economy are insufficient to predict ex ante the effect of this policy or that, then we cannot expect those models to explain what did in fact happen.

"The curious task of economics is to explain to men how little they really know about what they imagine they can design." F.A. Hayek.

The Reality and Relevance of Income 'Inequality'

Here are two splendid essays on the question of income differences.  The first is by my GMU colleague Tyler Cowen.  The second is by Max Borders.

Relatedly, my friend Brian Summers sends me this link – which (coincidentally?) mentions Tyler – from the Washington Post.

Imperfect, but true

Hayek discussing in his Nobel Prize lecture the causes and cures of unemployment, admits his ignorance:

It has, of course, to be readily admitted that the kind of theory which I regard as the true explanation of unemployment is a theory of somewhat limited content because it allows us to make only very general predictions of the kind of events which we must expect in a given situation. But the effects on policy of the more ambitious constructions have not been very fortunate and I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false. The credit which the apparent conformity with recognized scientific standards can gain for seemingly simple but false theories may, as the present instance shows, have grave consequences.

A few years ago, a journalist I respected asked me if NAFTA had been good for the United States, on net. I told him the question could not be answered empirically. Yes, the Economic Policy Institute had managed to estimate not just the total number of jobs NAFTA had destroyed (766,030–love that precision!), but could even calculate the number by state. But I confessed to being unable to even take a stab at the question. I told him that while you could certainly make an attempt to count factories that had moved to Mexico or Canada, it would be difficult or nearly impossible to assess the jobs that had been created because lower-priced goods were now available to Americans and that in turn freed up resources to create new goods and expanded availability of existing goods.

And that was just employment. How could anyone possibly measure the full impact across all Americans when so many other factors were changing at the same time and so much of the effect of expanded trade was impossible to observe directly and measure? I told him I was happy to tell him the logic of why I thought expanding trade was good for most Americans but I had to admit that I was unable to quantify that impact in any meaningful way.

His reaction was actually one of disgust and bewilderment. Or maybe just disbelief. You're a professional economist–you have to be able to make these kinds of calculations, he said. I apologized and he said that my response of empirical agnosticism was simply unacceptable.

I should have quoted Hayek and said that I "prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false."

Why the economy is like football

Hayek explains why the economy is like football. From his Nobel Prize lecture, The Pretence of Knowledge:

A simple example will show the nature of this difficulty. Consider some ball game played by a few people of approximately equal skill. If we knew a few particular facts in addition to our general knowledge of the ability of the individual players, such as their state of attention, their perceptions and the state of their hearts, lungs, muscles etc. at each moment of the game, we could probably predict the outcome. Indeed, if we were familiar both with the game and the teams we should probably have a fairly shrewd idea on what the outcome will depend. But we shall of course not be able to ascertain those facts and in consequence the result of the game will be outside the range of the scientifically predictable, however well we may know what effects particular events would have on the result of the game. This does not mean that we can make no predictions at all about the course of such a game. If we know the rules of the different games we shall, in watching one, very soon know which game is being played and what kinds of actions we can expect and what kind not. But our capacity to predict will be confined to such general characteristics of the events to be expected and not include the capacity of predicting particular individual events.

Macroeconomics is not a science. We don't understand the way the economy works in any way shape or form akin to way physicists understand the solar system, say. We shouldn't pretend otherwise.