Russell Roberts's Blog, page 1509

Robert Frank on Inequality

The latest EconTalk is Robert Frank talking about inequality. There's lots of back and forth–even more of a conversation than usual. There's lots of disagreement but it's very civilized. I enjoyed it very much.

At one point, Frank makes the case for a consumption tax with rates that rise steeply with income. He wants to discourage wasteful status competition while preserving the incentives for productivity. On the podcast, I agree with him that the pursuit of material success can be destructive to the human enterprise. What I should have added is that I don't want the government to play parent or clergy in getting me to be a better person–that's a task I'd prefer to emerge from the self-help, spiritual, and religious marketplace. When government gets in the business of improving us, it crowds out more competitive and responsive forces that would do the same. It also gets steered to achieve other purposes.

"Son Kills Parents and then Complains of Being Orphaned"

Here's a letter to the Los Angeles Times:

You report that "The markets also have been throwing the Fed another curve: While the goal of QE is to keep longer-term interest rates depressed, market yields on Treasury, corporate and municipal bonds jumped at the end of last week even as the Fed's Treasury-purchase program ramped up" ("Fed's bond-buying plan faces new assault by critics," Nov. 15).

"Even as"?!

This "curve" is no coincidental occurrence.  It's a direct and predictable consequence of the Fed's diarrhea of dollar creation.  That agency's goal might well be "to keep longer-term interest rates depressed," but economies reflect realities and not mere intentions.  And the reality is that market participants understand that this incontinent increase in the supply of dollars will spark higher inflation.  Creditors thus insist on higher long-term interest rates to compensate them for the dollar's falling value.

If this jump in bond yields is indeed a "curve," it's one thrown, not by markets, but by the Fed itself – and it's thrown not so much at the Fed, but at the heart of the economy.

Sincerely,

Donald J. Boudreaux

A Reply to Critics

I'll try my best to address the criticisms – both here in the comments section at Café Hayek and in the comments section at EconTalk – that have been raised in response to my recent EconTalk podcast with Russ – the podcast focusing on China's currency policy.

Some strands of the discussion must be separated.  First is the strand that complains of China's alleged undervaluation of the yuan as being simply a specific instance of Chinese protectionism.  In this strand, commenters point out that Chinese subsidization of that country's exports hurts America by taking away American jobs.

A second strand – one more substantial than the first – is the claim that Chinese currency intervention screws up price signals (including interest-rates) in the U.S., thus hurting Americans.

A third strand questions my argument that the Chinese currency really isn't undervalued.

About the first strand: that country A subsidizes some of its industries to make them more 'competitive' with industries in country B – and, therefore, that country A's policies cause job losses in these country-B industries – is a common complaint registered in discussions of international trade.  Russ and I have addressed it many times here at Café Hayek, as have many other economists over the ages addressed it in many different places, contexts, and manners.

The loss of specific jobs is not a problem with trade.  All trade causes some specific job losses; specific job losses are forever a part of the process of creative destruction that necessarily is fueled by dynamic, entrepreneurial capitalism.  That some of these specific job losses can be – and, indeed, are – caused not by any 'natural' comparative advantage enjoyed by foreign producers but instead result from favors that these producers receive from their countries' governments is irrelevant to the home market.  The person who loses his job because foreign rival A gained a 'natural' comparative advantage is no less distraught than is the person who loses his job because foreign rival B gained an comparative advantage only by being the recipient of government favors.

From the perspective of the domestic economy as a whole, foreign subsidization of imports into the domestic economy should be celebrated no less than are, say, developments of new product offerings or of new techniques of production.

…

The second strand has more fiber to it.  Being part of a global economy, monetary manipulation by foreign governments can harm the domestic economy.  China's monetary policy – if it is indeed too loose – distorts relative prices (including interest rates), and these distortions can work their way through not only China's economy but, also, through economies around the globe.

The question is: what to do about it?  Unfortunately, we live in a world of monetary nationalism.  As a rule, each government claims, and exercises, the right to be the monopoly supplier of its own money.  (Governments on the euro are, of course, an exception to this rule – just as one might say that the governments of Alabama, Colorado, New Jersey, Virginia, and other U.S. states are an exception to this rule.)

If we grant the principle that each government should have the authority to carry out discretionary monetary policy, what is the basis for concluding that the national government in Beijing keeps its currency undervalued?

The Fed chooses to increase or decrease the supply of dollars as it sees fit, and it uses a variety of tools to do so.  The Fed is no independent, outside intervener in the dollar market: it is the source of dollars and ultimate controller of the supply of dollars.  Likewise with the Chinese government and its currency.  The details in China differ from those in the U.S. – with respect to the relation of the People's Bank of China (PBOC) to the government in Beijing; to the particular reasons that motivate the PBOC to increase or decrease the supply of its currency, and to the particular tools that it employs to carry out its chosen policies.

But at the end of the day these details are just that: details, the goriness of which might fascinate pendants but which inevitably clouds the vision and warps the judgment of people whose ultimate concern is the big picture.

We ordinary Americans have little to no ability to corral "our" own central bank.  But we can at least complain about it (or praise it, as the case may be).  As far as the policies of non-American central banks, I believe the best – and most realistic – policy for Americans is to take that policy as a fact of nature, much as we take as natural the fact that, say, the French are especially good vintners, or that bananas don't grow well anywhere in the lower 48 states.

If U.S. government policy toward foreign governments could (1) be trusted to be exercised 'scientifically' (rather than politically), and (2) have a respectably good prospect of pressuring foreign governments into following policies that are better for the overall, long-run global economy, then a case could be made to have Uncle Sam, say, threaten Beijing with trade sanctions if Beijing continues to act in ways that are less than ideal from a global perspective.

But I have no such trust, and, therefore, believe that the best that we Americans can practically do is to jawbone Uncle Sam into pursuing a policy of unilateral free trade regardless of what other governments are up to.  The wealth gains to us of such a policy of unilateral free trade will almost surely be so great as to swamp whatever negative effects we Americans might suffer because of misguided policies practiced by other governments.

…

My reply to the third strand ought by now be predictable (if not universally accepted!).  Whether my speculation (expressed in the podcast) is correct or not about why Beijing is pursuing the exchange-rate policy it is pursuing, the policy it is pursuing is what it is.  From our perspective – from the perspective of non-Chinese – in this world of monetary nationalism and discretionary monetary policy, the value of any other government's currency is what it is.  Just how that value is achieved is not of any great relevance.

No Deficit of Misunderstanding

Here's a letter to the New York Times:

Robert Lighthizer is concerned that "our enormous trade imbalances – which require us to sell hundreds of billions of dollars in assets each year – will leave our children dependent on foreign decision makers" ("Throwing Free Trade Overboard," Nov. 13).

He can calm down.

First, his factual claim is false.  Foreign holdings of U.S. dollars increase America's trade deficit but involve no selling of U.S. assets.  Second, and more importantly, capital assets are not fixed in volume.  Capital can grow.

Suppose the Swiss firm Novartis builds a lab in San Diego and the American who sold the California land to Novartis uses the proceeds to start a business in Phoenix.  The result of these transactions – which increase America's trade deficit – is a larger stock of capital invested in the U.S. economy and higher worker productivity, but without any necessary net increase in America of the influence of "foreign decision makers."

Sincerely,

Donald J. Boudreaux

The above letter isn't the first that I've written in response to Mr. Lighthizer's unimpressive "pragmatic" undestanding of trade: these letters were written almost three years ago.

White Gold

My and Russ's colleague Larry White – who knows as much about the history and theory of money and banking as anyone alive – would like to see a debate over the gold standard that features at least one strong proponent of that means of mooring money.

One Reason to Hate Conservatives

Here's a letter to the New York Times:

Calling for a "national greatness agenda," David Brooks writes that "It will take a revived patriotism to lift people out of their partisan cliques.  How can you love your country if you hate the other half of it?" ("National Greatness Agenda," Nov. 12).

One half of America doesn't hate the other half.  Americans cooperate in countless polite ways with each other every day.  I just bought gasoline from an American-owned station near my home; I have no knowledge of the owner's politics and he none of mine.  And neither of us cares, for our interest in a successful commercial transaction is mutual.  Ditto for everyone else who buys or sells gasoline – and groceries and clothing and restaurant meals and nights at B&Bs and copies of the New York Times and on and on and on.  Americans get along peacefully and productively with each other every moment of the day in ways too many to list.

The only place the hatred mentioned by Mr. Brooks consistently arises is in the political arena, for it's there that Jones takes from Smith and Smith tries to protect himself from Jones.  In that setting, both persons naturally oppose, curse, and hate the other.  This hatred will only intensify the more our lives are politicized, whether by 'Progressives' or by 'national-greatness' conservatives.

Sincerely,

Donald J. Boudreaux

Or: "New York Firm Imports Labor from New Jersey"

A headline in Wednesday's Los Angeles Times reads "Lou Dobbs joining Fox Business Network."  Because Fox is owned by the Australian-turned-American Rupert Murdoch, that headline could have instead read: "Job Created for Lou Dobbs by Immigrant."

(HT Fima Shlimel)

Has the Fed been a failure?

George Selgin, William Lastrapes, and Larry White answer the question in the affirmative. Very provocative and educational paper regardless of whether you agree with their answer.

Poster Contest

Christopher Bauer sent me this wonderful poster he created:

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The photo in the background is a picture of the Ryugyong Hotel, a North Korean monstrosity. Very nice idea for illustrating the Hayek quote. Chris was looking for a photo he could use with permission and found this one.

I love what Chris did. But maybe you can do better. So let's have a contest for the best poster design that uses the Hayek quote with an illustration that you create or use with permission. So the illustration must be free of any copyright issues. The deadline for submission is December 10, roughly a month for now. Send entries to my email address russroberts at gmail.com.

The top three entries will receive an autographed hardcover copy of my book, The Price of Everything (or The Invisible Heart or The Choice if you prefer), and will have their entry honored here at the Cafe. Entries will be judged by me using my own idiosyncratic view of aesthetics, elegance, simplicity, and cleverness. And I reserve the right to choose fewer than three winners.

Shackling the Fed

Here is my comment at the New York Times on Robert Zoellick's recent comments on gold.