Russell Roberts's Blog, page 1521

Thank you, Mr. Llosa

Mario Vargas Llosa has won the Nobel Prize for literature. His book, Aunt Julia and the Scriptwriter helped inspire my book, The Invisible Heart.

The Curious Task

I do not believe we are on the road to serfdom or that President Obama is a socialist. But this scares the hell out of me (HT: Drudge):

Nearly a million workers won't get a consumer protection in the U.S. health reform law meant to cap insurance costs because the government exempted their employers.

Thirty companies and organizations, including McDonald's (MCD) and Jack in the Box (JACK), won't be required to raise the minimum annual benefit included in low-cost health plans, which are often used to cover part-time or low-wage employees.

The Department of Health and Human Services, which provided a list of exemptions, said it granted waivers in late September so workers with such plans wouldn't lose coverage from employers who might choose instead to drop health insurance altogether.

Without waivers, companies would have had to provide a minimum of $750,000 in coverage next year, increasing to $1.25 million in 2012, $2 million in 2013 and unlimited in 2014.

"The big political issue here is the president promised no one would lose the coverage they've got," says Robert Laszewski, chief executive officer of consulting company Health Policy and Strategy Associates. "Here we are a month before the election, and these companies represent 1 million people who would lose the coverage they've got."

Rule of law, anyone?

"The curious task of economics is to demonstrate to men how little they really know about what they imagine the can design." F. A. Hayek

We Need a Vaccine Against the Virus of Protectionism

Here's a letter to the Wall Street Journal:

In his otherwise thoughtful essay on "Liberalism's moral crisis on trade" (Oct. 7), Matt Miller describes what he calls "this awful, inexorable fact" – namely, "Global capitalism's ability to lift hundreds of millions of people out of poverty in China, India and other developing countries comes partly at the expense of tens of millions of workers in wealthy nations."

It's true that capitalism 'destroys' specific jobs.  (Usually these are jobs that capitalism earlier created.)  But this destruction is unleashed not only by foreign trade, but also – indeed, chiefly – by improvements in technology.  For example, Cyrus McCormick's mechanical reaper (first introduced in 1831) destroyed the jobs of farm workers who reaped grain manually.  What about this development was "awful"?  Yes, flesh-and-blood reapers lost their jobs – just as typists later lost their jobs to personal computers and laser printers, and persons who produced iron-lung machines lost their jobs to the Salk-Sabin polio vaccine.

But as with the jobs destroyed by Mr. McCormick, by personal computers, and by Drs. Salk and Sabin, jobs destroyed by foreign trade are destroyed, really, by progress and by consumer choice.  If this fact truly is "awful," then we should be, at best, ambivalent about the McCormick reaper and the Salk-Sabin vaccine.  That all sane human beings celebrate these 'job-destroying' technologies as unalloyed blessings suggests that we should celebrate with no less enthusiasm the consequences of free trade.

Sincerely,

Donald J. Boudreaux

Broken Eggs and No Omelets

Regime uncertainty … or George W. Bush's Awesome Adventures in Laissez Faire.  (HT Chris Hylarides)  Seriously, this arrogance is maddening and frightening.

A Keynesian House

Here's a letter to the New York Times:

Reciting Keynesian mythology, Daniel Gross writes that "for this recovery to mature, broaden and persist, the greatest economic force known to mankind – the American consumer – has to get back in the game" ("Credit for the Recovery," Oct. 6).  In fact, consumers have never been out of "the game": in the second quarter of 2010, personal consumption spending was at an all-time high of $10.46 trillion – more than 70 percent of GDP.*

The problem isn't inadequate consumer spending; the problem is private investment made inadequate by the prospect of higher taxes and a barrage of burdensome and vague regulations.  As economist Robert Higgs noted a few days ago, "In the most recent quarter, gross private domestic investment was still running at an annual rate more than 20 percent below its previous peak.  Net private investment was fully two-thirds below the previous peak."

For policy makers to focus on reviving consumer spending while private investment is drying up is like a homeowner focusing on installing more walls while the foundation of his house is crumbling.  The fact that the bulk of the house's surface area is made up of walls does not mean that walls provide the house with its principal support.

Sincerely,

Donald J. Boudreaux

* I calculated these figures from data found in the Higgs article linked to in my letter.

After reading this letter, George Selgin e-mailed to me the following note:

Consider what Edward Chamberlin had to say back in 1934.  Investment spending, he observed, "has been almost, if not completely, overlooked in the very great preoccupation of the recovery program with increasing consumer's buying power.  The truth is that, in the current depression, in spite of unemployment, purchases of consumer's goods have fallen off much less than have investments (purchases of capital goods)."  ("Purchasing Power," in The Economics of the Recovery Program.)

Some Links

If you read nothing else today, read Jeff Jacoby's column in today's Boston Globe.

Here's a great paragraph:

Greenery, as a secular religion, has come to dominate not just the curriculum, but the imagination. It's Blue Peter's recycled bottle tops on a grand scale: lessons on the dangers of global warming, projects on endangered species, litter-picking exercises. As any parent will testify, pester power is as often employed these days to guilt Dad into separating out the recyclables as to beg for the latest Transformer. Colleagues who have suffered their children's eco-scorn assure me that no member of the Inquisition was ever so ruthless, ever so certain of his faith, as their tiny Torquemadas.

John Stossel doesn't believe in witch-doctery.

Here's an interesting interview with economist Laurence Meyer.

Alex Tabarrok flags an early instance of nudging.

How to balance Uncle Sam's budget without raising taxes.  Cato's Dan Mitchell explains.

Lyndon Larouche Frequently Cites this Passage from Smith, Too

Normally I pay no attention to Muirgeo's comments, as his understanding of economics is too weak to justify wasting my time to address his assertions and numerous misunderstandings.  And that will continue to be my policy.  I will, however, break that policy here to prevent Muirgeo from misrepresenting Adam Smith.

Commenting on Russ's post on the logic of trade, Muirgeo favorably quotes Smith – apparently under the misapprehension that Smith shared Muirgeo's uninformed views about trade.  Here's Muirgeo's quotation of Smith, cut and pasted directly from Muirgeo's comment:

"But a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of inhabitants of the country, than an equal capital employed in the foreign trade company;"

First, and least importantly, the quotation is inaccurate.  Where Muirgeo has Adam Smith ending this quotation with "foreign trade company", Smith actually ended this quotation with "foreign trade of consumption".  We need not pause to ponder the difference in meaning, but only to point out that perhaps Muirgeo did not read Smith in the original but, instead, pulled this quotation from one of the many sites or pundits who are fond of citing this passage (from Book IV, Chapter 2, of The Wealth of Nations) to suggest that Smith wasn't really a free trader.

Second, the passage, in context, is perfectly unobjectionable.  If U.S.-based Acme Corp. spends $1M setting up a plant or warehouse in Botswana, that $1M obviously "puts into motion" more industry in Botswana than it does in America – or, said differently, the $1M invested in Botswana "puts into motion" less industry in America than it would have had it been used to build the plant or warehouse in the U.S.

But because increasing trade with Botswana enables Americans now to rely upon Botswanans to produce items that would otherwise have been produced in the U.S., capital – and an amount of labor and other resources in the U.S. – is now freed-up to be invested elsewhere in America.  This investment "puts into motion" a quantum of industry in the U.S. that (in Smith's view) equals the quantum that would have been "put into motion" had the $1M not been invested in Botswana but, instead, in America.

Both countries gain because both Botswanans and Americans are now more specialized; total output is now higher than it would be were there no commercial relations between Americans and Botswanans.

Third, let's read on in Smith after the quotation cited by Muirgeo.  Just four paragraphs later, here's what Smith says:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away from a more to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.

By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country. But though the industry of the society may be thus carried with advantage into a particular channel sooner than it could have been otherwise, it will by no means follow that the sum total, either of its industry, or of its revenue, can ever be augmented by any such regulation. The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue. But the immediate effect of every such regulation is to diminish its revenue, and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord had both capital and industry been left to find out their natural employments.

Trade Allows Each of Us to Take Advantage of the Unique Talents Of All of Us

I am taking the liberty of posting here Bryan Caplan's latest EconLog entry in full, for the point it makes is important and profound:

A Solipsist's Guide to Comparative Advantage

Bryan Caplan According to extreme solipsism, you're the only person who really exists.  Suppose this strange position were true.  What would it imply for the Law of Comparative Advantage?

Consider a standard textbook problem with two agents: you and me.  By hypothesis, I'm a mere illusion, but I'm still a useful resource.  Suppose that an hour of time yields the following output.

Wheat
Steel


You
10
1


Me
1
5

Now suppose that the wheat:steel price ratio is 1:1.  Ordinarily, we'd say that you could just trade with me, making us both better off.  But on the solipsistic assumption, you can correctly regard me as a mere tool for converting one unit of wheat into one unit of steel.  For all practical purposes, then, you can forget about my existence, and simply recalculate your own productivity:

Wheat
Steel


You
10
10

Now suppose I'm the solipsist, and you're illusory – a mere tool for me to convert one unit of steel into one unit of wheat.  Then I can forget about your existence, and simply recalculate my own productivity:

Wheat
Steel


Me
5
5

Of course, solipsism is false.  But we two solipsists can still teach the world a lesson.  Namely: in a deep sense, trade increases productivity:

Without Trade
With Trade



Wheat
Steel
Wheat
Steel


You
10
1
10
10


Me
1
5
5
5

You might object, "We already know that trade increases productivity via shared knowledge, increasing returns, etc."  But these are all empirical claims.  My point is stronger: Trade tautologically increase productivity.  And if a solipsist can see this, so should everyone.

He didn't get the memo

I guess Governor Christie didn't get the memo that we're all Keynesians now:

Voters are willing to accept the political pain of deep cuts in government spending as long as they know the pain is being spread equally, Christie argued. It makes sense to shrink government in tough economic times, and politicians seem to be the last to get that message, he said.

"We lost our way a number of years ago, and we became tax and spend light," he said. "Less spending, smaller government, less regulation, smaller government — we're going to be all about that again. We have to step up and stand for those principles again."

He was speaking in Iowa. Hmmm.

The loudest bag

I know competition encourages firms to respond to consumers. But this is a little bizarre even for me. The video: