Russell Roberts's Blog, page 1520
October 10, 2010
Low Prices Are a Benefit
Here's a letter to the Washington Post:
You complain about China's allegedly undervalued currency ("Mr. Wen confesses," Oct. 10). Please explain why we Americans should be upset if the Chinese government spends Chinese taxpayer funds to subsidize our consumption of Chinese-made goods.
The standard explanation is that China's cost advantage is 'unnatural'; it's the product of government policy. True – and were I a Chinese citizen I would protest against this wasteful misuse of my resources. But I'm an American, and so I – and Americans generally – benefit from the largesse that Beijing's policy bestows upon us.
Those who disagree with the previous paragraph should ask themselves if they would object to Beijing using Chinese-taxpayer funds to subsidize, say, world-class forestry schools throughout China in order to create there a comparative advantage in producing wood products – an advantage that it would not gain otherwise. Would Americans be harmed by this Chinese policy? Should Uncle Sam, under such circumstances, impose punitive taxes on Americans who purchase wood products from China? Of course not.
In principle, the education subsidies in the above example are no different than whatever subsidies Beijing now bestows on us fortunate consumers of Chinese exports.
Sincerely,
Donald J. Boudreaux
October 9, 2010
Exports and the Depression of 1920-21
Commenting on this post, Jeffrey Edelman offers Paul Krugman's claim that (in Krugman's words) "Historically, [in] the aftermath [of large] financial crises countries recover by having a huge exchange-rate depreciation, which then leads to an export boom."
I infer that Mr. Edelman believes that Krugman's claim constitutes a strong case for Uncle Sam to push Beijing to increase the value of the renminbi – which, of course, would depreciate the value of the dollar relative to the renminbi, thus (allegedly) sparking U.S. exports.
Alas, though, Krugman's history is weak.
One of the steepest financial crises and depressions in U.S. history began in January 1920 and lasted for 19 months. During that depression, Americans each month exported, on average, $583.6 million worth of goods. During the 19 months immediately following that depression, Americans each month exported, on average, a mere $321.0 million worth of goods. That is, exports during this period immediately after the depression were only 55 percent of what they were during the depression.
And not until October 1941 was there a single month following the depression of 1920-21 in which American exports again reached the level of their 1920-21-depression monthly average.
Clearly, this depression was not ended by any "export boom."
And To Make Matters Worse, They Keep Consumer Prices Here Low!
Here's a letter to the Los Angeles Times:
Eric Weiner writes about the Chinese government that "by simply moving the maturities of some of its $850 billion in Treasury holdings from 90 days to 60 days, it could cause chaos in the U.S. stock markets" ("China's giant economic sway," Oct. 9).
Perhaps. $850 billion is, for America, fully 9 percent of its total outstanding government debt held by the public (including foreign governments). But if such chaos ensues, the ultimate blame would be not on creditors who lawfully demand early repayment, but, rather, on Uncle Sam's outrageously uncontrolled spending. This spending – and the gargantuan debt incurred to fund it – threatens private capital accumulation both today and tomorrow. The increased risk of high inflation, the certainty of higher taxes, and the continued breakdown of any limits on the range of activities funded by the state are prime ingredients in a recipe for significant economic trouble – trouble that any prudent investor might react negatively to.
Sincerely,
Donald J. Boudreaux
****
First breath (spoken with hat in hand): "Please lend us plenty of money. It'll help us to 'stimulate' our economy so that it'll grow."
Second breath (spoken on the record at a 'summit' of 'leaders'): "How dare you lend us so much money! You are keeping our economy from growing!"
Third breath (spoken loudly and self-righteously on the campaign trail): "Elect me and I will protect us innocent Americans from the scheming, greedy, and devilish Chinese!"
October 8, 2010
A thought experiment
Talking to my same smart friend about World War II, he said, "Surely World War II created prosperity. People who had been out of work had jobs in the tank factory and had money to spend. There was zero unemployment. Don't tell me that the military expansion of World War II didn't improve the economy!"
Here is my answer.
Suppose the Federal Government in WWII decided to stay out of the war. Strict isolationism. But they decided to build the tanks and airplanes and bombs anyway. Instead of delivering those weapons to Europe and Pacific Fronts, they secretly blew them up at night and destroyed them. The people working in the factories never knew. They were never told. Instead they thought they were contributing to the war effort. The soldiers who would have fought in the war were given uniforms (and there were of course all kinds of factories making the uniforms, full of workers). They trained. But they never fought. They simply were told that other soldiers were at the front but their time hadn't come yet. So all the soldiers had jobs and the tank factories and bomb factories were full of workers, many of whom had been unemployed.
Full employment. 100%. Not just that. In this thought experiment, the federal government set the wages in the tank factory high enough that there was a waiting list. Not only were all the people who had been unemployed now working, but a lot of people, women for example, found it worthwhile to work. Lots of people had more money to spend than ever before.
So what would happen to the private sector of this economy? Would it grow or shrink? All those women who hadn't worked before. So many two-income families. Full employment!
But it wouldn't thrive. And it didn't thrive in the 1940′s. And it has nothing to do with the fact that the tanks were actually used on the beaches of Normandy. Or that people died fighting the Nazis. You can't create prosperity by destroying stuff either for real or pretend.
Or better yet, imagine a factory that's called a tank factory but they don't produce any tanks. They just pay people to pretend to make tanks. But they pay the workers a lot. There's zero unemployment, the work force is expanding and people have a lot of money. Would that economy prosper? All that spending and all that income. Surely it would thrive! But it wouldn't. There's less stuff to buy. You'd be poorer as a group. Not as poor as when you actually built the tanks. And not as poor as when people died in real fighting. But you'd still be poorer if lots of people were working in the fake factories.
Spending doesn't create prosperity.
They DO Have a Comparative Advantage at Imprisoning Political Dissenters
Here's a letter to the New York Times:
Responding favorably to the presumptions that motivated a column by Paul Krugman on the alleged economic depredations of China, former M.I.T. management professor William Gruber complains about "the failure of the United States to compete" (Letters, Oct. 8). Never mind that in the 1990s Mr. Krugman wrote many an excellent essay explaining that all talk of national economies "competing" against each other is sheer nonsense.
If Mr. Gruber means that Americans are somehow failing economically, especially compared to China, he's wrong. First, per-capita income in China today is what it was in the U.S. in 1932. Chinese per-capita income now ranks behind such economic giants as Namibia, El Salvador, and Albania. Second, manufacturing output in the U.S. reached an all-time high in 2007, and declined slightly in 2008 (to its level in 1999) and is today recovering. Third – and the chief fuel for the prodigious growth in American manufacturing output – per-worker productivity in manufacturing is skyrocketing in the U.S. Today that output is just shy of 50 percent higher than it was in 2000, 130 percent higher in 1990, nearly 200 percent higher than in 1980, and almost 250 percent higher than in 1972.
Myths and misconceptions do not good policy make.
Sincerely,
Donald J. Boudreaux
Does government spending create jobs?
I was talking to a very bright friend the other day about government spending and Keynes. He said something like, well of course spending on infrastructure creates jobs, it has to. He's in good company. Here's Steven Pearlstein writing in the Washington Post:
the last time I checked the textbooks they still say that deficit spending by the government actually increases employment and economic activity. To believe otherwise is to believe that hundreds of billions of dollars in tax cuts and stimulus spending somehow disappeared from the economy without a trace.
In this view, the job creation impact of government spending is simply a matter of arithmetic. In the Pearlstein view–and he is right, it is mainstream textbook analysis–when you spend money, you create jobs. Is my friend right? Especially when you spend money on infrastructure, aren't you guaranteed to create jobs?
He is right that if the government builds a bunch of bridges, there have to be workers to build the bridges. So in that sense, spending creates jobs. As I have pointed out before, a very small percentage of the stimulus package went to spending on what we would call infrastructure. According to John Taylor, writing in September, 2010, only $2.4 billion of the stimulus had been spent on infrastructure. But let's focus on the dollars that actually went to build roads and bridges. Is my friend right? Yes, there is a payroll with employed people. But did the spending create jobs? Usually we would mean by that question, new jobs, or more jobs on net than there were before.
To answer that question, you'd have to look at where the workers came from. Were they unemployed before they were hired to working on the bridge? If their leaving created job openings at their old firms, did that create an opening for an unemployed worker? If the skills of bridge building are somewhat specialized, then the effect of the spending on new bridges is to raise the demand for workers with those skills. That will in turn increase the wages of workers with similar skills, making them less desirable and somewhat offsetting the increase in workers on the bridge. Then there are the raw materials used to make the bridges. The increase in demand for those materials will also increase the price of those materials, discouraging their use and possibly reducing employment elsewhere, partially offsetting the workers hired to build new bridges. So it is hard to say what the full impact on the net number of jobs will be. And the answer would also depend on where the funds came from to build the bridges. Taxes? Borrowing? Printing money? All of these will have an impact elsewhere in the economy. But I think the deeper way to ask the question is not to focus on new jobs vs. net jobs, but on the very ideas of jobs.
Suppose the government hires people to dig holes and fill them back in. I pick that example for two reasons. One, Keynes used the argument twice in The General Theory. In Chapter 10:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
And again in Chapter 16:
"To dig holes in the ground," paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
The second reason is that I heard Joseph Stiglitz agree to this with a straight face when asked by a member of Congress. (The video is here. If anyone has the patience to find the time mark or transcribe the Q and A, much appreciated.) Keynes and Stiglitz both said it would be better to do something productive, but even unproductive labor would have a stimulative effect.
I would make a different observation. If the government pays people to do stupid unproductive things, these are not really jobs. The "workers" receiving a "salary" are really just on a glorified version of unemployment compensation or welfare. The digging of the holes is just a tax, a punishment, the hoop you have to jump through for getting your government check. No one else would pay you to do it. There is nothing productive accomplished. The practice will end as soon as the government program ends. So in what sense has the government created jobs. You could just as easily call everyone who receives unemployment compensation, a "worker" and eliminate unemployment that way.
I am really only making a pretty simple point. Expanding the federal payroll via bridge building, or hole digging, or fighting a war for that matter, may or may not create jobs on net. And there is no reason to think that you have integrated these workers back into the economy or done anything productive. That depends on what you have them do. Having them do nothing–either because the task is unproductive or because you simply give them a check with no strings attached–does not in and of itself create prosperity for anyone other than the people who get the check. But what about the Keynesian multiplier? What about the spending that these people do in turn once they have their checks and go and buy other stuff. Won't that in turn create new employment? It could. Or it might not. As I have written before, it could just increase prices without increasing output. Or output could go up because of productivity increases–people working harder–instead of more people working.
Is this really reasonable? Is it really possible to inject all kinds of money into the economy without getting more jobs? We know it's possible just like we know that it's possible to create all kinds of jobs without spending more money. To say it in the most simple terms: when the economy is healthy, you don't need to spend money from outside to create more jobs. And when the economy is not healthy, all the spending in the world won't create jobs. In the latter case, consider Zimbabwe, that prints too much money. Or the example I've given before of foreign aid designed to alleviate poverty. The money comes from outside the economy. But countries receiving foreign aid designed to end poverty don't get rich. They stay poor. Their economies are broken. Giving their people money doesn't create jobs. The necessary institutions and culture simply don't function well there. And on the flip side, think of soldiers coming home from WWII at a time when government spending was going to collapse. How did they manage to find jobs? It was easy. The economy was healthy. The Keynesians predicted catastrophe and they were wrong. Or look at women joining the work force in ever larger numbers over the last 50 years. How did they manage to find work. Jobs emerged from the economy somehow for them to have. We didn't have to worry about sticky wages or boosting demand. The economy was healthy.
Today the economy is not healthy. Something is broken. Not totally. Unemployment isn't 25%. It's 9.6.%. But the summer of recovery is over. There wasn't much recovery, at least on the jobs front. The Keynesians will tell you that the stimulus worked but we just didn't do enough. My take is that the stimulus did little to repair what was broken.
And what exactly is it that is broken? What is unhealthy? Consumers are spending again, at record levels. The simplest answer is that businesses are not investing. Investment is still very low. I'd like to hear the case of how government spending lots of borrowed money encourages business to invest. It would be a hard case to make. It seems to me that government spending of borrowed money, especially on unproductive stuff, discourages business investment. But I'm not sure that's the right way to think about it. It's not obvious that caution or restraint in business investment is the reason the labor market is so mediocre. Arnold Kling talks about recalculation and "Sustainable Patterns of Specialization and Trade." He helps me think about what is going on, But there is more than that. Why is it that it is sometimes easy to recalculate or create new patterns of trade and specialization such as the time after WWII or for most of the time that women were entering the labor market in ever larger numbers. It is a mystery that we don't fully understand. But what I think I do understand is that the link between government spending and jobs is not nearly as automatic as many people think.
Do You Believe in Magic?
Here's a letter to USA Today:
Jonah Goldberg might be correct that young Americans are today much less spellbound by Barack Obama than they were in 2008 ("To Obama's chagrin, young voters get serious," Oct. 7). But I wonder if the perverse instincts that prompted such rapturous devotion in the first place are really disappearing. A feature of the national character that H.L. Mencken diagnosed in 1919 likely remains no less vibrant today, for it appeared as recently as two years ago: "We are, in fact, a nation of evangelists; every third American devotes himself to improving and lifting up his fellow citizens, usually by force; the messianic delusion is our national disease."*
Barack Obama is only the most recent symptom of this ridiculous and dangerous malady.
Sincerely,
Donald J. Boudreaux
* H.L. Mencken, Prejudices: A Selection (Baltimore: The Johns Hopkins University Press, 1996), pp. 7-8.
October 7, 2010
Austerity or prosperity?
When you ask Keynesians for empirical evidence of how government spending creates prosperity, their best and most frequently cited answer is how World War II ended the Depression–a massive, increase in deficit-financed government spending. But as Robert Higgs has pointed out, the sharp decrease in unemployment that resulted was not due to the magic of some Keynesian multiplier but rather from conscription–forcing Americans into the Army. Higgs also argues that the increase in GDP is distorted by the challenge of measuring the value of government output–does the price of a tank commissioned under government contract represent value the way the price of a car does?—and price controls–some things were cheap but they were not freely available.
I use a more anecdotal but perhaps more persuasive argument. There was no wartime prosperity in the US or the UK or Germany. No one who lived through those times remembers them as a time of booming economic activity. It was a time of hardship and privation unless you were in the business of making tanks or bombs or bullets. There was no Keynesian multiplier. A dollar of spending on a tank didn't "stimulate" the private economy. A dollar of government spending didn't create $1.52 worth of economic output. More tanks meant fewer cars because steel became more expensive and workers did too. And there were fewer resources available for private use.
When I mentioned this to my collaborator John Papola, he pointed me to this post by Paul Krugman that dismissed my argument. Krugman was reacting to this post by Bob Hall and Susan Woodward that made a similar observation to mine arguing that spending in WWII increased GDP by roughly the amount of the spending. There was no stimulative effect. Hall and Woodford don't argue for a negative effect–here the Higgs argument about measurement is relevant. But they do argue there was no positive effect on the rest of the economy.
But Krugman wants to argue that the Keynesian multiplier was alive and well. He has a two word response to Hall and Woodward (and presumably to my argument as well):
Um, rationing?
He then quotes from a U.S history web site:
With the onset of World War II, numerous challenges confronted the American people. The government found it necessary to ration food, gas, and even clothing during that time. Americans were asked to conserve on everything. With not a single person unaffected by the war, rationing meant sacrifices for all.
Help me out here folks. I and others argue that government spending in WWII—a giant spike in government spending financed by debt—did not create prosperity and economic recovery. It created hardship because you can't eat bombs, you can't wear tanks, and you can't sweeten your coffee with bullets. And Krugman, who is a trained economist with a Nobel Prize argues that we're wrong. It wasn't crowding out or a failure of the Keynesian multiplier. The reason we're wrong is that the US government forced people to get by with less because of a government program called rationing. He appears to be arguing that if ti weren't for rationing, then we would have seen the Keynesian multiplier in all its glory. What the heck is he talking about? Does he think the rationing is what produced scarcity rather then being a response to scarcity?
One of the most mindless aspects of the multiplier is to treat is as a constant, such as 1.52. It can't be a constant, not in any meaningful way. If the government conscripted half of the US population to dig holes all day and conscripted the other half to fill them back in, and paid each of us a billion dollars a day for the task, and valued holes that were dug and holes that were filled in at a trillion dollars a hole, then GDP would be very very large, unemployment would be zero and there would be no stimulating effect and we would soon be dead from starvation. (I ignore the staffing challenge of forcing people to do their tasks.)
The fact that WWII did not stimulate the private sector does not prove that Keynesianism always fails. Maybe a smaller army and fewer tanks would have done the trick. But it certainly does not prove that it was a success. It was not a success. It did not stimulate the private sector. It did not create an extra 50 cents or two dollars on top of the original expenditure as the recipients of government contracts and their workers had more money to spend. It starved the private sector. It was a failure as an example of Keynesian stimulus.
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