Russell Roberts's Blog, page 1499

For the children?

Chris Van Hollen, my "representative" in Congress, makes the case for re-introducing the estate tax HT: National Journal):

With Washington Republicans sharpening their budget knives to cut spending on national priorities such as education, border security and public safety, it is hard to believe they think it's wise to give a windfall to heirs such as Paris Hilton.

First, education is not a national priority. It's my priority to take care of my four children. But more importantly, please Mr. Van Hollen, give me just the tiniest bit of evidence that your concern for education actually does something for the children, mine or anyone's.

Paris Hilton is at least entertaining to millions of Americans. The money that Washington spends on education has little or no impact on the children Van Hollen purports to care about. The main beneficiaries of that spending are consultants and highly-paid school administrators. Let Paris have it.

Don't Get Fooled By Accounting Conventions

In my latest column in the Pittsburgh Tribune-Review, I grapple again with the issue of America's trade deficit – doing so in a way that addresses some of the (many) objections that I've encountered over the years.  Here are the opening few paragraphs:

Suppose Toyota sells a $20,000 car to an American and then immediately uses that $20,000 to buy software from Microsoft. Because the value of additional U.S. imports (a car) equals the value of additional U.S. exports (software), there's no change in the U.S. trade deficit.

Now tweak the example just a bit. Toyota sells a $20,000 car to an American, then uses that $20,000 to buy stock in AT&T from another American. The American who sold the AT&T stock, in turn, spends the $20,000 on software from Microsoft as part of his effort to launch a new business. Because Toyota spent none of the $20,000 on U.S. exports, the U.S. trade deficit rises by $20,000.

Is the second situation worse than the first?

If the pronouncements of the mainstream media and of most politicians are to be believed, the answer is a resounding yes. A rising trade deficit is bad!

But look more closely. In both cases, Americans get an additional car worth $20,000, and Microsoft produces and sells additional software worth $20,000. In both cases, the amount of extra American-made output produced and sold as a consequence of Toyota selling that car to an American is the same: $20,000 worth of Microsoft products. If you're a Microsoft employee, shareholder or creditor, it matters not a whit to you whether that company's increased sales are made to foreigners or to Americans.

Clearly, a rising U.S. trade deficit does not necessarily mean less demand for American-made goods and services.

And as the above examples show, nor does a rising U.S. trade deficit necessarily mean that Americans are losing assets. While an American did sell $20,000 worth of stock to a foreigner, that American used the proceeds from the sale to invest in — to "grow" — his own company. If his company succeeds, that American's net worth increases.

That American is richer, no American is poorer, and the American economy has more capital in it — all as a result of a transaction that raised the U.S. trade deficit.

And Jevons Was No Marginal Scholar

Here's a letter to the New York Times (HT Chris Meisenzahl):

You report that China risks encountering "peak coal," thus making that country's continued economic growth "unsustainable"  ("Does China Face a 'Peak Coal' Threat?" Dec. 14).

Your report reminds me of William Stanley Jevons's book The Coal Question.  In the Preface to the second edition, Jevons warned his fellow Brits that "The question here treated regards the length of time that we may go on rising, and the height of prosperity and wealth to which we may attain.  Few will doubt, I think, after examining the subject, that we cannot long rise as we are now doing."

Jevons's dire warning was written in 1866.  It was the product of an accomplished scholar steeped in the science of his day.  Nevertheless, was Jevons correct to predict that Great Britain's economy would soon stop growing because coal supplies were destined to shrink to dangerously low levels – low levels that drove the price of industrial power to heights that stymied economic growth?  No.  (British economic growth did slow for quite some time during the 20th century, but that was due to a surplus of socialism rather than to a shortage of coal.)

As your report today demonstrates, predictions of resource depletion and a resulting serious slowing of economic growth are in abundant supply.  But there's a severe shortage of evidence to support these fears.

Sincerely,

Donald J. Boudreaux

Some Links

Here are a couple of instructive posts by Carpe Diem's Mark Perry on gender issues.  First here.  Then here.

Oh heck – even more from Mark: here he is on one of the many ways that imports create jobs.

The Mercatus Center's, and Social Enterprising's, Karol Boudreaux celebrates American generosity.

Reason's Nick Gillespie shares his recipe for cutting the budget.

Let's return to Carpe Diem for even more interesting data: look at how many U.S. imports are inputs into goods and services produced in the U.S.

Finally, here's an interview with the great Deirdre McCloskey.  (HT Arnold Kling)

The economics of haircuts

The latest EconTalk is about haircuts. No, not the repo market but the real thing, an interview with Wafaya Abdallah who runs a hair salon. Most of the conversation is about the challenges of running a small business–motivating employees, compensation design, worries about competitors. But you'll also discover how much a serious haircutter pays for her shears.

Another Open Letter to Sen. Sherrod Brown

Sen. Sherrod Brown (D-OH)

United States Senate

Capitol Hill

Washington, DC

Dear Sen. Brown:

About your and Sen. Olympia Snowe's (R-ME) proposal to tax American consumers more heavily if Beijing refuses to conduct its monetary policy according to your liking, you proclaim that "Addressing Chinese currency manipulation is vital to getting our economy back on track" (reported by Reuters, "U.S. senators push for China currency bill," Dec. 13).

Your objection is that, by keeping the prices Americans pay for Chinese products low, this alleged currency manipulation harms the U.S. economy because it 'destroys' some American jobs.

So do you also oppose efforts to upgrade America's infrastructure?  Consider, for example, that tens of thousands of miles of smooth Interstate highways – by making freight transport faster and less subject to disruption – reduce transportation costs and, hence, reduce the prices consumers pay for goods (not to mention steals jobs from railroad workers, as well as from motel maids, diner cooks, and truck repairmen – all of whom would find more work were America's highways more congested and pitted with potholes).

And, of course, education: will you seek to rein it in, too?  The more educated the populace, the greater is its capacity to devise labor-saving technologies.  Surely your heart breaks whenever you ponder the damage done to the U.S. economy by all of these educated Americans who are forever finding ways to produce more output with less labor.

Sincerely,

Donald J. Boudreaux

P.S. My offer to debate you on free trade vs. protectionism remains open.  If you're so certain of protectionism's merits, then you ought have no fear of explaining and defending those merits in a public forum against someone, such as myself, who believes that protectionism is dopey strange – someone who is so benighted as still to cling to the doctrine of unilateral free trade.

Fallows on Orszag

James Fallows is as dispirited as I am by Peter Orszag moving to CitiGroup, which is now a reality (HT: Josh Rosner):

Objectively this is both damaging and shocking.

- Damaging, in that it epitomizes and personalizes a criticism both left and right have had of the Obama Administration's "bailout" policy: that it's been too protective of the financial system's high-flying leaders, and too reluctant to hold any person or institution accountable. Of course there's a strong counter argument to be made, in the spirit of Obama's recent defense of his tax-cut compromise. (Roughly: that it would have been more satisfying to let Citi and others fail, but the results would have been much more damaging to the economy as a whole.) But it's a harder argument to make when one of your senior officials has moved straight to the (very generous) Citi payroll. Any competent Republican ad-maker is already collecting clips of Orszag for use in the next campaign.

- Shocking, in the structural rather than personal corruption that it illustrates. I believe Orszag (whom I do not know at all) to be a faultlessly honest man, by the letter of the law. I am sorry for his judgment in taking this job,* but I am implying nothing whatsoever "unethical" in a technical sense. But in the grander scheme, his move illustrates something that is just wrong. The idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution — and then, less than two years after his Administration took office, would take a job that (a) exemplifies the growing disparities the Administration says it's trying to correct and (b) unavoidably will call on knowledge and contacts Orszag developed while in recent public service — this says something bad about what is taken for granted in American public life.

When we notice similar patterns in other countries — for instance, how many offspring and in-laws of senior Chinese Communist officials have become very, very rich — we are quick to draw conclusions about structural injustices. Americans may not "notice" Orszag-like migrations, in the sense of devoting big news coverage to them. But these stories pile up in the background to create a broad American sense that politics is rigged, and opportunity too. Why do we wince a little bit when we now hear "Change you can believe in?" This is an illustration.

_____

* What choice did he have? He could have waited a while. He could have gone to a lucrative job at a business school or even a think tank, for perhaps half-a-million per year versus many millions. He could have written a book and gone big time on the lecture circuit. He could have taken a corporate job somewhere other than finance. He could have taken a finance job someplace other than Citibank (or Goldman Sachs or AIG etc..) There were other possibilities. I am sorry to go down a list like this, because it inevitably sounds preachy — and again, this is not about Orszag except as an example. It's about the pattern, which people should be angry about.

In my earlier post when the Orszag move, I mentioned that part of Orszag's value to Citi is his ability to call  people in the Administration and the regulatory apparatus to help Citi with its problems. Actually, this is "against Federal ethics rules" as this New York Times story points out (along with a lovely description of Orszag's non-job description):

Mr. Orszag's actual duties are murky at best. He is expected to draw on his deep knowledge of public sector financial issues and his experience overseeing the federal budget to counsel Citi's clients on various policy actions. He is also expected to be something of a corporate rainmaker.

One client he cannot advise, however, is Uncle Sam. In keeping with federal ethics rules, Mr. Orszag is not allowed to have any contact with federal government officials.

Of course, Orszag can give other Citi folk his rolodex and they can do the calling. I also wonder how and how often these ethics rules are enforced.

Hayek poster contest update

I received many wonderful entries for the Hayek poster contest. The winners will be announced later this week.

The Grinch meets Coase and Pigou

Superb poem from Art Carden (HT: Liya Palagashvilli). Art might prefer to call this post "The Grinch meets Rothbard and Pigou" but for me, his poem his very Coasian. Either way, it's very well done.

Tread-Bare Mercantilism

Here's a letter to the Wall Street Journal:

U.S. Trade Representative Ron Kirk describes the WTO's approval of Uncle Sam's tariffs on Chinese tires as a "major victory" ("WTO Backs U.S. in Tire Dispute With China," Dec. 13).

A "major victory" for whom?  Certainly not for Americans who must now fork out more money to buy Chinese tires; they lose.  And because American tire producers now no longer have to compete vigorously against Chinese rivals, even Americans who buy American tires lose by having to pay higher prices for their tires.

A third group of losing Americans are those who now, because of the higher prices caused by this tariff, delay replacing their old tires: their lives are in greater peril whenever they're in their cars.  (Indeed, drivers who, because of this tariff, drive on worn tires are a hazard not only to themselves but to all drivers.)

Sadly, on matters of international-trade policy, what governments describe as "major victories" are nearly always actions that enable politically potent corporations to pick the pockets of, and to otherwise abuse, ordinary men and women.

Sincerely,

Donald J. Boudreaux