Russell Roberts's Blog, page 1498

Mass prosperity

David Leonhardt on the philosophical debate over ObamaCare:

The opposition stems from the tension between two competing traditions in the American economy. One is the laissez-faire tradition that celebrates individuality and risk-taking. The other is the progressive tradition that says people have a right to a minimum standard of living — time off from work, education and the like.

Both traditions have been crucial to creating the most prosperous economy and the largest middle class the world has ever known. Laissez-faire conservatism has helped make the United States a nation of entrepreneurs, while progressivism has helped make prosperity a mass-market phenomenon.

What is the evidence that progressivism made prosperity a mass-market phenomenon? A minimum standard of living? The social safety net in the US is modest. For most of the 20th century, there was a minimum standard for single women with children but not for men. Welfare programs didn't create mass prosperity. The minimum wage, passed in 1938, has never been set very high and affects very few people. It also discourages employing the lowest skilled workers. That works against mass prosperity. Time off from work? Mostly a market phenomenon, I think. To the extent it has been imposed in opposition to market forces, it has worked against measured mass prosperity. Education? It would be useful to know the impact of mandatory schooling and child labor restrictions. How much impact did they have beyond what would have happened voluntarily? And any impact of mandatory education would have to be offset by the quality loss of public provision. I'd be curious to know what else Leonhardt has in mind. I do think his view is a staple of some folks in their world view. I've just never seen a serious attempt at making the case. It's just asserted as a truth. It could be a truth. But my suspicion is that it's a myth.

Mass-market prosperity has been driven by innovation combined with competition forcing producers to share productivity increases with consumers. This is the story I tell in The Price of Everything. Some innovation was created by the government, though perhaps not cost-effectively. but most innovations have been driven by the potential for profit combined with a love of creating. Happy to hear facts to the contrary or a book that makes the case for progressive policy as an important force in creating the middle class or mass prosperity.

The moral case against the estate tax

I make the case here. Tell me what I could have said better. Tell me what I left out.

Mark Thoma and I see the world differently

Mark Thoma writes (HT: Brad Delong):

Regulation is rarely flawless when it is first imposed. Adjustments are needed to make sure that the intent of the original legislation is carried out, and to plug any new holes that are discovered.

He goes on to say that because the Republicans are pawns of the banking industry, they won't bother fixing any problems with regulation.

I don't know what the intent of any legislation is. I have enough trouble defining it in a personal context let alone in the context of a political outcome. Why did someone do me a favor? Affection? Kindness? In hopes of my reciprocating down the road? To impress me or their friends? All of the above? When I look into my own heart I can't even untangle those motives though I certainly know what to say when someone asks.

In a political decision, whose intent should I count? The economists who imagined how it might turn out if everything went smoothly? The person on the street who has a one or two sentence version of the legislation in mind? (This legislation will save the country! Or, this legislation is for the children!) The politicians who supported it even though they didn't like it? The politicians who supported it because they thought it would help them get elected? The lobbyists who twisted it so that it benefit their friends?

What was the intent of the tobacco settlement? The intent according to some was to punish the evil tobacco companies. Some say it was to help the children avoid smoking via education policies. I have no idea what the intent was. I do know the settlement made tobacco companies and lawyers a lot of money. I don't think it did anything for the children. Yes, many activists and even some politicians had a different intent. But again, I don't think that concept is meaningful. There is no  single intent. There are multiple intentions and the result that comes out of the sausage factory depends on the machinery that does the processing. The result emerges. It is no one's intent.

Politicians say things about what they intend. But I don't take that very seriously. Politicians from both parties will say that they bailed out the financial system as a way to preserve Main St. and to prevent a systemic collapse and so on. But if the way that the financial system was preserved was done in a way to make money for Wall Street, what was "the" intent of the policy? Politicians and administration officials and central bank appointees have supported policies that keep salaries and compensation at investment banks artificially high. Politicians of both parties move back and forth between Washington and Wall Street. Was that the intent? Or was it just a series of bad luck and mistakes?

My essay on these issues is here.

Answering a Question

Mr. Richard B__________:

Thanks for your e-mail.

You write about my latest column in the Pittsburgh Tribune-Review:

Help me out here, please.  Your examples typically show the Toyotas in turn spending that $20K on something American.  What if Toyota decides to invest that $20K in China Air?

Good question.

To invest that $20,000 in China Air, Toyota would likely first convert those dollars into yuan and then use the yuan to invest in China Air.  The question then to ask is: why did a holder of $20,000 worth of Chinese yuan part with such a sum in exchange for U.S. dollars?  The answer is that that yuan-seller (or someone else to whom he can sell his dollars) wants to buy goods or services from Americans or to invest in America.

(If the seller of China Air shares accepts Toyota's dollars directly in exchange for those shares, the same analysis in the previous paragraph holds.)

The point is that foreigners accept U.S. dollars in exchange for their wares for the very same reasons that Americans accept dollars: to spend them, invest them, or hold them.  Whatever might be the merits or demerits of any of these three ways to use dollars, there's nothing about an exchange taking place across a political border that makes it special or uniquely deserving of measurement or attention, or of applause or disdain.

Don

The private provision of public goods

I actually think a playoff system is not a particularly good idea for college football, but here's one man who disagrees and who might single-handedly fund a solution that millions think would make the world a better place.

Some Links

John Stossel is a great consumer advocate!  Tune in tomorrow night to see why.

The Cato Institute will celebrate the 50th anniversary of Dwight Eisenhower's "military-industrial complex" warning.

Boston Herald columnist Michael Graham offers some facts about today's taxes.

And here's my colleague (and EconLog's) Bryan Caplan on Bob Murphy on the recent tax deal.

Matt Ridley elaborates on Steve Landsburg's criticism of Paul Krugman's claim that protectionism can't cause a depression.

Still Fed Up

Here's a letter to the Wall Street Journal:

John Dearie praises the Fed lavishly for its performance during the recent financial crisis (Letters, Dec. 16).  Such praise is as deserving as that which would be heaped upon an arsonist who, after igniting a building into flames, does the same to a neighboring warehouse on the theory that the second fire will counteract the first.

The celebrated monetary economist George Selgin persuasively argues that central banks (including the Fed) are economically destabilizing.  Moreover, even the role of lender-of-last-resort – explicitly praised by Mr. Dearie – hardly deserves such accolades as Mr. Dearie bestows.  Consider Selgin's discussion of the 19th century British origins of the lender-of-last-resort doctrine.

Selgin notes that "[lender-of-last-resort champion Walter] Bagehot believed that central banks were financially destabilizing and hence undesirable institutions and that it would have been far better had England never created one.  He offered his lender-of- last-resort formula not as an ideal, but as a first aid to what was, in his view, a fundamentally unhealthy arrangement, the healthy alternative to which was free banking, with numerous banks issuing their own notes and maintaining their own reserves, as in the pre-1845 Scottish banking system.  England needed a lender of last resort not to rescue it from crises inherent in competitive banking, but to limit the severity of crises that were inevitable consequences of the monopolization of currency."

Again, an arsonist who tries to mitigate the calamitous effects of his pyromania is hardly a praiseworthy figure.

Sincerely,

Donald J. Boudreaux

Bootstrapped Self-Sufficiency

Here's a second letter to the Washington Post on Harold Meyerson's deep misunderstanding of economics and trade:

Harold Meyerson calls for "a tariff on offshored products, with the proceeds to go to a fund enabling such companies to manufacture their products domestically" ("Save the economy by keeping jobs at home," Dec. 15).

Let's start small by trying this policy first only on the Meyerson household.

Mr. Meyerson can charge his wife and children a steep fee every time they purchase a good or service from entities outside of their household.  He can then use the proceeds from this fee to subsidize his, his wife's, and his kids' household production of all that the Meyersons consume.  No more Meyerson-household job's destroyed by imported food, clothing, furniture, haircuts, etc.  All will be produced in-house, with the expense for generating this happy outcome of high-quality household self-sufficiency paid for by the very tax that dissuades the Meyersons from purchasing non-Meyerson-made goods and services in the first place.

If this strategy works for the Meyersons, we can then consider extending it to the country at large.

Sincerely,

Donald J. Boudreaux

More Meyerson Mythology

Here's a letter to the Washington Post:

Ever hostile to American consumers who stretch their dollars by buying imports, Harold Meyerson writes that "Defenders of corporate offshoring assert that we can't compete with low-cost labor in China and other developing countries" ("Save the economy by keeping jobs at home," Dec. 15).

Untrue.  No knowledgeable defender of free trade has ever uttered such nonsense.  The case for free trade is that foreigners can produce some products more efficiently than can Americans, but that Americans (despite our high wages) produce other products more efficiently than foreigners.

Low-wage labor is generally not low-cost labor.  The reason is that the productivity of low-wage workers in China and other developing countries is much lower than is the productivity of workers in America.  While low-wage foreigners outcompete high-wage Americans at many low-skill, routine, and repetitive tasks, high-wage Americans can (and do) outcompete low-wage foreigners in those tasks that can be performed efficiently only in advanced economies that are full of the machinery and intricate infrastructure – physical, legal, and cultural – that raise wages by raising worker productivity.

In short, high American wages aren't a disadvantage; they are a happy reflection of the fact the typical American worker is a powerhouse of production.

Sincerely,

Donald J. Boudreaux

Review

Very nice review of my book, The Price of Everything, over at Our Dinner Table. For some reason, Amazon is discounting it by 40%. You can get it for $10.14 these days.