Russell Roberts's Blog, page 1507

Sink the QE2

You can read Paul Krugman, writing in today's New York Times, attempt to justify the Fed's latest spasm of money creation.

And you can read my former GMU colleague Bill Shughart, writing in today's Washington Times, explain why the Fed's latest spasm of money creation is unjustifiable.

David Ricardo talks to Ben Bernanke

Ben Bernanke is the latest famous economist to rail at the Chinese for daring to continue to sell us stuff at low prices. From the WSJ (HT: Drudge):

"Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals?" Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-term strategy of pushing for export-led growth with cheap exchange rates.

In my book, The Choice, I discuss outsourcing, in particular, the use of foreign workers instead of Americans to write computer code. The first speaker in the dialogue is the ghost of David Ricardo. He is talking to Ed Johnson, the head of a company worried about foreign competition. Here is an excerpt from their discussion. It explains why I think Bernanke is wrong to worry about China hurting the US.

"Suppose one day a brand-new car appeared in the driveway of every American with the keys in the ignition and a card on the front seat guaranteeing free gasoline for life. And there's a note in the glove compartment saying that after five years, the car will be replaced by another free one. Would you drive that car? Would it matter whether it was a gift from an American or a foreign supplier?"

"Sure it would. If it were made by a foreign supplier it would mean the end of the American auto industry. You've told me that it has gotten smaller over the years. But free cars from foreigners would kill it."

"So if you were president of the United States you'd go on TV and the radio and warn the American people of the dangers of accepting the gift. You'd tell them it was a Trojan horse that would destroy the economy from within. You'd collect all those cars for a giant scrap drive in order to preserve the U.S. auto industry and American prosperity."

Ed hesitated. I could see there was something bothering him.

"What's wrong?" I asked.

"That does seem a little bizarre, destroying all those cars."

"Let's flip it around. Suppose you wake up in the morning, and there's no new car in the driveway—just the same one that you've been driving. But the president makes a similar speech. A government official will be coming to get your car and drive it off a cliff where the remains would be buried. Sure you're going to have to buy a new car, but employment in the U.S. auto industry will increase, and prosperity will follow, won't it? Or will it? Would that policy make America richer or poorer?"

"It would make Detroit richer."

"That's right. The auto industry would expand. But the country as a whole would be the poorer for it. You don't get rich destroying things. You get poorer. And the opposite is the road to prosperity. Free cars—or merely less expensive cars—make the country richer. Bad for Detroit. Good for everyone else. And the harm to Detroit would be offset not just by your happiness because you'd never have to pay for a new car again. The other effect would be what you'd do with the money you didn't have to spend on cars. And all the extra traveling you'd be doing with that free gasoline. A whole new set of activities would spring up. Some of those activities would use the workers from those abandoned auto factories. But there'd be new opportunities for young people just entering the labor market as well."

"I see that."

"That's the part of the story that was missing when people complained about foreigners providing computer services at a lower cost than Americans. It did put some Americans in some industries out of work at first. But it let companies pay a lot less for computer services. Companies that couldn't afford computers before were now able to. Companies that already were using computers expanded their use of technology. The worriers ignored all those benefits and all the new things that became possible because Americans didn't have to spend as much as they did before to get computer technology. And as it turned out, only the lowest-paying computer jobs became less numerous. Those were the jobs that foreigners could do at a distance much more cheaply than Americans. Between 1999 and 2004, when the worries about outsourcing were at their peak, the number of computer programmers in America fell by 25 percent. But the number of software engineers rose by 50 percent, more than making up for the lost jobs in computer programming. Overall, the number of high-paying computer jobs rose by 17 percent, and the real wages of American workers in the computer industry increased as well. Outsourcing made most workers in the high-tech sector better off as demand for those skills increased."

"But what happens when foreigners figure out how to do those jobs at lower wages?"

"Why, there'd be nothing interesting left for Americans to do. Americans would just shrug, pick up their laundry detergent, and report to the massive laundromat where everyone would work."

"Now, Dave, don't—"

"Sorry, Ed. I don't mean to get frustrated. But your worry about what will come along to take the place of computer jobs is the oldest worry in the world. And it never, ever turns out to be true. Look at all the new jobs we've talked about tonight that didn't exist in 1960. In 2060, there will be a whole new bunch of jobs we can't imagine now that will come along and replace what Americans do today. The good jobs of today are going to disappear the same way that buggy manufacturers and leech ranchers disappeared. They will disappear because we will find new and cheaper ways to get things done. That's good."

"What's a leech rancher?"

"Sorry, I made it up. When doctors used leeches, there must have been people who raised them. I don't know what they were called. Something will come along in 2060 that will make today's medical devices look like leeches. And the creative people who come up with those new products will find the resources and time to find those new products because the world's wealth will grow and make those discoveries possible. There's one more thing people ignored when they worried about Indians learning how to do something once done by Americans."

"What's that?"

"Both sides benefit from trade. America gets wealthier using cheaper Indian computer programmers. But India benefits, too. Do we really want to use only American expertise when America can benefit from the skills of Indians? Do we really want to keep those poor Indians from using their skills in a bigger, richer market that demands their skills? Very cruel."

What technology wants

Yesterday, I interviewed Kevin Kelly for EconTalk. His new book, What Technology Wants, is one of the best books I have read in a long long time. Full of interesting ideas and insights and beautifully written. Get it here if you want to read it before the podcast–about ten days from now. And read it whether you're going to listen or not. So many provocative and thoughtful ideas. I started to give a summary of them, but just read the book or listen to the podcast as an intro. I have highlighted more passages in this book that taught me something or moved me than any book I've read in many years.

Wrong goal

I was listening to Tony Kornheiser's AM radio show this morning and referring to people who are upset about being groped patted down he said something like they were missing the goal of the whole thing which was to keep the plane from being blown up. But we know that's not the goal. If that were the goal, we would ban air travel. That is the only certain way of achieving the goal. (And it would be very successful it that really were the goal.)

But the other point is that it's not the right goal. The goal isn't to stop x y or z regardless of the cost. That's why the ban on air travel is useful. It helps you see that there are some costs not worth paying. How have we come to a point where we think it's OK for 99.9% of the population to suffer indignity to protect us from the other .1%? One answer is that there's no "we." We didn't decide this. Somebody decided it for us.

The right goal is that we should offer choices and restrict choices if those moves enhance the human enterprise, giving us more freedom to express ourselves, to create, to enjoy, to love, to be moved, to dance, to sing, to harmonize with others. And yes, to stay safe from evil people so we can do those things. But staying safe isn't worth it if there is too much indignity or if it empowers people who do not care for me to do things that hurt me or that profit them at my expense.

Farce Becoming More Farcical

Here's a letter to the Wall Street Journal:

Fed Chairman Ben Bernanke, fresh from injecting hundreds of billions of new U.S. currency units into the economy – and from planning the injection of yet an additional 600 billion such units – criticizes the Chinese government for injecting hundreds of billions of new Chinese currency units into the economy ("Bernanke Takes Aim at China," Nov. 18).  Apparently, when Beijing increases the supply of Chinese currency it does so as part of what Prof. Bernanke ominously labels a "strategy of currency undervaluation," but when Uncle Sam does the same thing with U.S. currency units it's called "quantitative easing" and "a move in the right direction."

And then there's this gem that you report: "Mr. Bernanke notes that in preventing the yuan from appreciating, China has accumulated a massive $2.6 trillion stock of U.S.-dollar assets."  No mention by Prof. Bernanke that the Bush-Obama 'stimulus' spending was accomplished only because Uncle Sam sold jubababillions of U.S. Treasuries.  Poor, innocent Uncle Sam – heroically borrowing from creditors eager to lend.  And rich, dastardly China – connivingly lending to debtors eager to borrow.

Can anyone articulate an adult reason why we treat the pronouncements and predictions of Prof. Bernanke and other Washington maharajahs more seriously than we treat the proclamations of late-night infomercial announcers or the predictions of Nostradamus junkies?

Sincerely,

Donald J. Boudreaux

Inflated Reputation

Here's a letter to the Washington Post:

George Will doubts the Fed's ability to carry out its "dual mandate" ("The trap of the Federal Reserve's dual mandate," Nov. 18).  His doubt is well-founded.

This mandate, as described in 2007 by Federal Reserve governor Frederic Mishkin, is for the Fed "to promote the two coequal objectives of maximum employment and price stability."

How's it doing?

The Great Depression occurred on the Fed's watch, as have several other recessions.  As for price stability, from the Fed's creation (in 1913) to 1945, the dollar lost 45 percent of its value; between 1945 and 1980 it lost another 78 percent of its value; and between 1980 and today yet another 62 percent of the dollar's value was inflated away.  All told, during the less than 100 years that the Fed has been charged with keeping the value of the dollar stable, the dollar has lost 95 percent of its value.  This shrinkage in the dollar's value since 1913 is especially striking in light of the fact that, between 1790 and 1913, the dollar's value declined by only about 8 percent.*

Given this performance, Americans should be well and truly fed up.

Sincerely,

Donald J. Boudreaux

* See George Selgin, William D. Lastrapes, & Lawrence H. White, "Has the Fed Been a Failure?" (Working paper, Nov. 2010), p. 3:

far from achieving long-run price stability, it [the Fed] has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed's creation from what it had been at the time of the dollar's establishment as the official U.S. monetary unit, to fall dramatically. A consumer basket selling for $100 in 1790 cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913. But thereafter the price soared, reaching $2422 in 2008.

Denationalize Money

Here's a letter to the Washington Post:

George Will's superb column on the Fed's over-expansive "dual mandate" ends with an apt warning from the late Nobel laureate economist F.A. Hayek that any attempt to engineer economies – even via monetary policy – is evidence of a "fatal conceit" ("The trap of the Federal Reserve's dual mandate," Nov. 18).  It's unsurprising, therefore, that Hayek was among the first economists to call for removing government from the business of supplying and regulating money.

In 1976, Hayek published a pioneering monograph entitled Denationalisation of Money* in which he argued that not only can markets supply sound money, but that markets are likely to do so far more reliably than will any government or central bank.

Hayek's work is the font of a fertile river of research on the history and theory of 'free banking' (whose chief contributors are my GMU colleague Lawrence White and my former GMU colleague George Selgin**).  This research leaves no doubt that, had money been supplied privately from the start of the republic, U.S. economic growth would have been both steadier and steeper.

Sincerely,

Donald J. Boudreaux

* F. A. Hayek, Denationalisation of Money (London: Institute of Economic Affairs, 1976).  A substantially revised second edition was published in 1977.

** See, e.g., George A. Selgin and Lawrence H. White, "How Would the Invisible Hand Handle Money?" Journal of Economic Literature, Dec. 1994, Vol. 32, pp. 1718-1749.

Bruce Springsteen on motivation and politics

I think a lot lately of the Boss's view of human desire and the public choice. It's from the song Badlands on the album, Darkness on the Edge of Town:

Poor man want to be rich

Rich man want to be king

And a king aint satisfied till he rules everything

I talk about stimulus

I was on Minnesota Public Radio talking about what Obama should have done under the presumption that what he did has failed. I'm pretty confident that most of what he did, he shouldn't have done. But what he should have done? Much harder.

Uncommon cents

At dinner the other night, one of my children asked me why we have coins–why we don't just use paper for everything and it got me thinking that coins, at least in the denominations we currently have. The penny is almost irrelevant already. Yesterday I was buying something that came to $2.03. I gave the cashier three singles and rather than give me the 97 cents in change, he just returned one of the dollar bills. With the Ben Bernank in charge, I am pretty sure that the penny (and maybe the nickel and dime, too) will be out of commission very soon. Merchants will post prices rounded to the nickel or the dime (or dollar) and the government will stop making pennies.