Russell Roberts's Blog, page 1500

Of Central Importance

In this concise and clear article, from the Spring 2010 issue of The Independent Review, George Selgin reviews the origins of central banking and the reasons why these banks are destabilizing.

Lose the We

Here's a letter to the Washington Post:

Fareed Zakaria writes that "The basic problem in the U.S. economy is that for a generation now, we have been consuming more and saving and investing less" ("Procrastination economics," Dec. 13).

Who's "we"?  I haven't consumed more than I've earned.  But being an American, I get confusingly lumped in with a group of people who do spend wildly: a majority of elected U.S. government officials.  They spend wildly because they spend other people's money.

Suppose local mafia goons, confident in their on-going ability to extract wealth from shop owners and residents in their neighborhood, borrow without hesitation to finance their and their pals' lavish lifestyles.  Would anyone issue a blanket condemnation of the neighborhood, accusing its denizens of profligacy?

The fact that the mafiosos who "protect" us win their positions through elections – meaning, they buy their offices with other people's money – does not alter the fact that A is not irresponsible just because B borrows from C in order to give to D, with the bill for repayment handed in the future to A and to A Jr.

Sincerely,

Donald J. Boudreaux

Creative Destruction

My buddy Bruce McLane alerted me to Maureen Callahan's article in today's New York Post – in response to which I sent this letter:

The arguments that Maureen Callahan lobs as grenades against technological change and trade are duds ("Not made in the USA," Dec. 12).  The reason is that each of these arguments would have been equally applicable to 19th-century America, with the only difference being that the fear back then would have been the decline of agricultural employment rather than of manufacturing and low-skill service-sector employment.

In 1820, 79 percent of Americans worked in agriculture.  This number, however, was progressively reduced by improvements in technology.  Chemical fertilizers and pesticides; mechanized planting and harvesting equipment; refrigeration; improved veterinary medicine; better irrigation; faster transportation; and improved packaging for produce – along with more food imports made possible, in part, by motorized sea and air travel – all "destroyed" millions of agricultural jobs.

Would the proper policy in the 19th century have been to stymie these changes because many workers who knew nothing but farming lost their agricultural jobs?  If you agree that the answer is "no," then it's senseless to draw policy conclusions from Ms. Callahan's lament for "the 45-year-old toll taker replaced by the E-ZPass" and "the 50-something cashier replaced by a self-service scanner."  These jobs, and the others whose demise Ms. Callahan mourns, were themselves made possible only because technology and trade had earlier eliminated the need to have so many people toil on farms and ranches.

Contrary to Ms. Callahan's claim, the trend of technology and trade changing the contours and contents of economic opportunity did not begin 30 years ago: it began in earnest in the 18th century.  And contrary to Mr. Callahan's suggestion, this trend is utterly essential to continued economic prosperity.

Sincerely,

Donald J. Boudreaux

Chronicling Crony Capitalism

Here's a letter to the New York Times:

You report that Goldman Sachs, JPMorgan Chase, and Morgan Stanley are using their influence over newly established derivatives clearinghouses to line their own pockets by suppressing competition ("A Secretive Banking Elite Rules Trading in Derivatives," Dec. 12).  Now that's a shocker!

Who would have dreamed that these politically connected Wall Street behemoths, after being bailed out with taxpayer money, would now be able to rig – for their own monopolistic advantages – the operation of the clearinghouses that our very own, democratically elected government engineered into existence in the wake of the 2008 financial meltdown?  Surely you're correct to describe this startling phenomenon as an "irony."

What bad luck.

Sincerely,

Donald J. Boudreaux

Some Links

Here's Frederic Bastiat's great essay on "The Balance of Payments" – the essay in which Bastiat uses the reductio ad absurdum of sinking export-bearing cargo ships in the middle of the ocean.

Bill Easterly's take (in today's Washington Post) on John Lennon's politics is far more developed and insightful than my own take.  (Speaking of the late, great Beatle, Russ shares with me this essay whose author argues persuasively that Lennon abandoned much of his jejune statism before he was killed – although, thankfully, not his opposition to war.)

I especially love (truly) the quotation from Sen. Judd Gregg in today's column by Jeff Jacoby.

Tibor Machan is disgusted at envy of the rich.

Here's Sven Wilson explain the extraordinariness of everyday life in modern market-oriented society.

In today's New York Times, Tyler Cowen explains some unfortunate (unintended?) consequences of Obamacare.

Arnold Kling is no fan of monetary-disequilibrium theory.

People Produce (and Export) Only in Order to Consume (and Import)

A number of folks have written to me by e-mail, and have left comments at the post, to question the correctness of the reductio, in my recent letter, of the U.S. dumping its exports into the ocean.

The reductio obviously fails (at least in my version of it) if it causes confusion.  So, I concede: it doesn't work as I've used it.

But I should explain why the objection raised by most of my correspondents and Cafe commentors also doesn't work.

It's true that, unlike U.S. exports dumped into the ocean, U.S. exports actually unloaded on foreign docks generate money income for American producers.

But what's the value to Americans of receiving this money?  Ultimately, that value is what this money can purchase abroad – the amount of goods, services, and assets that Americans are able to buy in foreign countries.

The only reason for exporting is to import – and the success of a country's exports is measured by the value of imports these exports fetch in exchange (either currently or in the future).  That's why all the talk of imports and trade deficits being drags on the economy is so misleading.

Keeping in mind that the ultimate value of buying assets in foreign countries lies in enabling their owners to increase their consumption in the future, the point remains that the success of American efforts to export is measured by the value of imports that we Americans receive in return for our exports.  The more imports per unit of export, the better off we are.

In an ideal world (for Americans), we'd get oodles of imports in exchange for no exports – but that would be the worst of worlds for our 'trading partners.'  Likewise, the ideal world for our trading partners would be for them to receive enormous amounts of exports from America in return for no exports from their own countries – but that would be the worst of worlds for us Americans.

Those who applaud Americans getting lots of money for their exports, but who then criticize Americans for importing, or who regard greater American imports as a detriment to America – that is, those who are critical of Americans for using their export earnings to improve their living standards – are inconsistent and confused.

Open Letter to Charlie Stross

You wrote yesterday at your blog that

Corporations do not share our priorities. They are hive organisms constructed out of teeming workers who join or leave the collective: those who participate within it subordinate their goals to that of the collective, which pursues the three corporate objectives of growth, profitability, and pain avoidance. (The sources of pain a corporate organism seeks to avoid are lawsuits, prosecution, and a drop in shareholder value.)

Corporations have a mean life expectancy of around 30 years, but are potentially immortal; they live only in the present, having little regard for past or (thanks to short term accounting regulations) the deep future: and they generally exhibit a sociopathic lack of empathy.

Well now….

While I don't defend the special privileges that politically influential corporations receive, the entity you describe here is much more like government than like the typical corporation.

Governments successfully pursue growth (look at the data); they're enormously profitable for those who claw, connive, or charm their way into top political positions (look at history); their operatives infamously sell their souls to avoid the pain of losing the next election (look, for example, at Al Gore's recent confession of wooing Iowa voters, during one of his presidential bids, with lies about his enthusiasm for corn-based ethanol); their time-horizons never extend beyond upcoming elections (see the previous point); and they are humankind's hands-down champs at exhibiting "a sociopathic lack of empathy" (look at the bloody annals of history, starting with Robert Conquest's documentation of the tens of millions of people killed by their own governments in the 20th century alone).

The typical corporation might not "share" my "priorities," but I'm under no obligation to patronize it.  Not so with the state: it commands, and I obey under penalty of death.  Do you believe this latter arrangement to be better for ordinary men and women than the former?

Sincerely,

Donald J. Boudreaux

Better Yet: Sink the Ships Along with the Cargo

Here's a letter to FT.com:

Reporting on the fall in the US trade deficit, your writers cheer that "The new data are especially encouraging because they show stronger overseas demand for US industrial goods and suggest that some of the rise in imports this year may have been temporary" ("Exports shrink US trade gap," Dec. 10).

Let me get this straight: we Americans should find it "especially encouraging" that we're on track to produce more for foreigners while foreigners are not on track to produce more for us?  Is that correct?

If it's really true that America's economy is strengthened whenever the ratio of our exports to our imports rises, then we should trade, not with other countries, but with the open ocean.  Let's daily load hundreds of cargo ships with American-made goods; pilot these ships out to sea; and then dump all the cargo into the open ocean.  Lots of exports; zero imports; no trade deficit.

Sounds like a formula for prosperity, eh?!

Sincerely,

Donald J. Boudreaux

UPDATE: A couple of folks wrote to remind me that the dump-the-cargo-at-sea analogy originated with Frederic Bastiat.  That's exactly true.  I'd forgotten that that greatest of all economic popularizers used this reductio.  My apologies to Bastiat's ghost for my forgetting that I got this example from him.

Taxophiliac

Here's a letter to the New York Times:

Paul Krugman writes: "But a large part of the tax cuts, especially those for the wealthy, would not be spent, so the tax-cut extension increases the budget deficit a lot while doing little to reduce unemployment" ("Obama's Hostage Deal," Dec. 10).

Prof. Krugman is unfair to your readers in his failing to at least acknowledge the main argument that many economists offer against raising tax rates.  This argument is that higher tax rates on incomes and capital-gains – by reducing the return to work effort, savings, investment, and risk-taking – constrict economic activity and, thereby over time, diminish economic opportunities and reduce real wages.

The chief argument for lower tax rates is not that these lower rates prompt more immediate consumer spending but, instead, that they prompt more investment, risk-taking, enterprise, and production.

Sincerely,

Donald J. Boudreaux

I thank my buddy Hans Eicholz for the title of this post.

And here's Bill Anderson's reaction to Krugman's column.

When Words Lose Their Meaning….

Here's a letter to the Los Angeles Times:

You write that "Washington's compromise on estate taxes provides an unnecessary handout to a few thousand wealthy families" ("The state of estates," Dec. 9).

Whatever are the merits, or lack thereof, of a tax on estates, you are deceptively wrong to call a decision not to raise that tax a "handout."  Because taxes are paid from resources created and earned by private citizens, resources that are not taxed are not "handed out" to the people who created or earned them; these people already rightfully own these resources.

It makes no more sense to describe government's (non-)act of not raising taxes as a "handout" than it does to describe my (non-)act of not stealing your purse as a "handout."  Failure to understand this fact creates the mirage that government is the source and original owner of all wealth.  Not only is such a notion of the state utterly false empirically, it is also – because it is a close cousin of the notion of the divine right of kings – the seed of tyranny.

Sincerely,

Donald J. Boudreaux