Russell Roberts's Blog, page 20
May 11, 2023
Boudreaux and Perry on the Myth of a Stagnant Middle Class
More than a decade ago – in the January 24th, 2013, edition of the Wall Street Journal – GMU Econ alum Mark Perry and I added our voices to those who try to bust the myth of American middle-class stagnation. You can read our piece in full beneath the fold.
Bonus Quotation of the Day…
… is from page 22 of the late, great Harold Demsetz’s penetrating 1982 tract, Economic, Legal, and Political Dimensions of Competition:
Competition in a private property system is expected to guide resources to those uses that maximize the value of production secured from them. This value is measured by what consumers are willing to pay, making due allowance for the implicit value of leisure and other goods consumed outside the formal market arena. The profit criterion stops uses of resources that would result in more cost than benefit as these are measured by the money votes of consumers.
DBx: With impressively few words, Demsetz here conveys two crucial insights that are usually ignored by opponents of the free-market order.
The first insight is that, in the free-market order, competition and the resulting pattern of prices and wages do not ignore ‘economic’ goods and services (such as leisure) that are not directly exchanged on markets. More importantly, nor do competition and market prices and wages ignore ‘non-market’ values such as emotional attachments to local communities or the benefits of having one parent remain home full-time with young children. The market – specifically here, the combination of competition, freedom of contract, and market prices and wages – allows people to make their own individual trade-offs among these non-market goods and services. But in doing so it, the market, internalizes on each decision-maker the bulk of the costs and benefits of his or her decisions. Such internalization is the best means of ensuring that everyone is treated equally, with no one getting to free ride on others or being compelled to pay for others’ consumption.
For example, when competitive markets ‘destroy’ particular jobs (by conveying through prices knowledge that consumer desires have changed or can be served at lower cost), they do not thereby deny to individuals the ability to live in their most-loved communities. Far from it. But competitive market do insist that each person who chooses to consume such a non-market good pay personally for this consumption – say, in the form of accepting lower wages rather than move elsewhere for jobs paying higher wages. The market does not compel Smith and Williams to pay for Jones’s consumption of non-market amenities any more than the market compels Smith and Williams to pay for Jones’s consumption of goods and services directly exchanged in markets.
When people such as Oren Cass and other advocates of that vague phantasm called “common good capitalism” assert that markets do not allow individuals to express values for non-market goods and services, these people simply don’t know what they’re talking about. Their understanding of the market order is defective. What such complaints about the market order boil down to is that the particular non-market values that rank high in the preference orderings of “common good capitalists” do not rank as highly in the preference orderings of individuals who must pay for those preferences.
The second insight conveyed by the quotation above is that, in markets, the profit motive works – at least better than any known alternative – to direct resources to where they do the most good for society at large (and, hence, away from wasteful or harmful uses). Until and unless advocates of industrial policy describe a realistic alternative to the profit motive – guided as it is by market prices and wages – they have no business asserting that their schemes will outperform the market at serving “the common good.”
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Pictured above is Harold Demsetz (1930-2019).
Some Links
When Zucman released his stats to the New York Times in 2019, several economists noticed something fishy in his arithmetic. His calculations made the assumption that wealthy shareholders bear the entire burden of corporate taxation. But corporate-tax incidence spreads across a variety of economic actors due to pass-through effects and the distortions that these taxes create for investment. For example, workers ultimately pay about 20 percent of the corporate-tax burden, according to the center-left Urban Institute–Brookings Tax Policy Center. Other estimates suggest that as much as 40 percent of the burden falls on labor. By assuming these difficult realities out of existence, Zucman severely overstates the estimated tax burden on wealthy Americans in the mid 20th century, when federal corporate-tax rates were much higher than they are today. In other words, he overestimates the top earners’ “before” picture, which exaggerates the before-and-after comparison of tax rates.
Zucman uses a similar sleight of hand for the bottom end of the income distribution. He intentionally excludes the earned-income tax credit and the child tax credit from his math. By omitting these refundable credits, his statistics overstate — by nearly twice as much — the tax rates on the bottom 20 percent of earners. These adjustments create the illusion that taxes on the wealthy have declined over the past half century while taxes on the poor have dramatically increased.
Reality paints a different picture, and Zucman once conceded as much. Shortly before he made his famous claim in 2019, the Berkeley economist co-authored a paper using more-conventional accounting methods to estimate the tax burden of the top 0.001 percent of earners. According to those findings, these earners paid an estimated 42 percent of taxes in 1964 and 41 percent in 2014, suggesting that the overall tax rate on the ultra-wealthy was essentially unchanged in the intervening half century.
So, what accounts for this discrepancy between Zucman’s studies? Zucman appears to have placed his finger on the scale. Shortly before his news-making claim in 2019, it seems, he quietly deleted the conflicting data from his website — until other economists noticed the cover-up. In the aftermath of this discovery, former treasury secretary Larry Summers declared that he was “about 98.5 percent persuaded by [Zucman’s] critics” that the data are “substantially inaccurate and substantially misleading.” Even Harvard balked at Zucman’s apparent propensity to bend his academic research to fit his political views. The university reportedly canceled a job offer to the economist in 2020 over concerns about his data integrity.
The AEA’s medal citation clouds Zucman’s academic malpractice in unintentional euphemism. The association credits his “entrepreneurial and creative pursuit of new data and methods for economic measurement.” It certainly takes “creativity” to craft a narrative favoring wealth taxation when the wealthiest earners already shoulder the largest share of the tax burden, and when our tax system is already highly progressive. Sadly, the AEA has chosen to side with left-wing politics over empirically verifiable reality.
Antony Davies describes “Paul Krugman’s magic act.”
Research confirms the impact of debt on long-term interest rates. Every percentage point increase in the debt-to-GDP ratio is associated with an increase of three basis points (0.03 percent) of the long-term real interest rate. So, if the debt ratio rises by 100 percent over the next 30 years, it will put upward pressure on interest rates of about three percentage points.
Writing in the Wall Street Journal, Ilya Shapiro debunks the claim that Clarence Thomas is akin to Abe Fortas. Two slices:
Abe Fortas has been in the news of late—a feat for someone who died in 1982. Amid a campaign by Democrats and partisan journalists to tar conservative Supreme Court justices for “ethics” violations, outlets including the New York Times, the Washington Post and NPR have cited the example of Fortas’s 1969 resignation, implying that the justices they disfavor might want to follow it.
But there’s no parallel. Fortas embodied cronyism and corruption, with direct conflicts of interest involving parties with business before the high court and legal advice to a businessman who was investigated, indicted and convicted of federal felonies. He also acted as a regular adviser to a president whose administration, like every administration, was a repeat Supreme Court litigant. None of the currently serving justices have been accused of anything remotely comparable.
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Justice Fortas resigned not over some chain of hypotheticals but over financial conflicts that failed the smell test even among his partisan supporters. He was felled by greed and hubris in a way that went beyond disclosure mistakes. It’s a far cry from any of the smears, insinuations and trivial, error-filled reporting we’ve seen leveled at the current justices over the past month.
Ryan Bourne, writing with Sophia Bagley, counsels calm about stock buybacks. A slice:
The Chamber is right to be wary of this anti‐buyback drumbeat. Stock repurchases occur when public companies buy shares of their own stock—distributing money to shareholders in exchange for reclaiming company ownership. As I have noted before, critics claim they come at the expense of productive investment and that they enrich executives by manipulating the earnings per‐share ratio. Combined, these effects are said to represent capitalism’s worst features: a short‐term unwillingness to invest driven by rampant executive self‐interest.
Such criticisms are misguided. When existing shareholders are compensated for their shares, these funds do not simply disappear. As my colleague Adam Michel noted earlier this year, one paper estimates that 95 percent of funds used for stock buybacks are reinvested elsewhere in the economy. What’s more, if critics are right that firms engaging in buybacks are leaving lucrative investment opportunities on the table, we’d expect the long‐run share price and earnings per share to be lower after buybacks.
A recent poll conducted by Chicago Booth’s Kent A. Clark Center for Global Markets demonstrates that 40 top financial economists are baffled by anti‐buyback hysteria too.
Quotation of the Day…
… is from page 527 of F.A. Hayek’s brilliant Postscript – “Why I Am Not a Conservative” – to the Definitive Edition (Ronald Hamowy, ed., 2011) of Hayek’s 1960 volume, The Constitution of Liberty:
[I]t is this nationalistic bias which frequently provides the bridge from conservatism to collectivism: to think in terms of “our” industry or resource is only a short step away from demanding that these national assets be directed in the national interest.
DBx: Indisputably so.
With different notions of just what is, and what best serves, ‘the national interest,’ people such as Oren Cass and Marco Rubio of course disagree with people such as Robert Reich and Elizabeth Warren on many details of how and why government should intervene into peaceful individuals’ private and commercial affairs. But the essence of the interventions proposed by the Casses and Rubios of the world is identical to that of the proposed interventions of the Reichs and Warrens: Both are collectivist. Each of these persons distrusts market forces while trusting that government officials with the power to allocate resources by diktat will ‘get things right,’ or at least consistently enough outperform the market.
Yet none of these people – not Cass, not Rubio, not Reich, not Warren, not any of their followers, fans, or fellow travelers – can tell us where the government officials given the power to allocate resources in contradiction of market signals will get the information necessary to ensure that these officials’ allocation choices will redound over time to the net benefit of the people of the country. Each of these industrial-policy advocates simply identifies various imperfections – sometimes real, sometimes merely the cost-side of inescapable trade-offs, sometimes a mere distaste for other people’s preferences, and sometimes wholly imaginary – and then leaps to the conclusion that if government officials are given the power to ‘address’ these’ imperfections’ these officials will do so not only apolitically but with enough information to ensure that these ‘imperfections’ are ‘corrected’ and in a manner that will yield net benefits to the people at large.
That’s it. No further explanation is offered. It’s truly as if advocates of industrial policy pray to the god called ‘Government,’ confident in their faith that their god will do their bidding if only enough of their fellow citizens join them in their prayers.
The naïveté is stunning – and scary.
May 10, 2023
Befuddling
In addition to very kindly linking, at National Review‘s “The Corner,” to my criticism of Michael Lind’s ignorant attempt to discredit the case against minimum-wage legislation, George Leef noted the immorality of such legislation. I thank George for the link and applaud his own critique of Lind.
But I did something that I almost never do, namely, looked at the comments. In the comments section on George’s post I stumbled upon head-scratcher one from “FranklinPierce”:
You dictate your own value by what you’re willing to accept as a wage, not what’s being offered.
Corporations would pay you less if they could, which means the government places a higher value on your labor than a corporation.
This comment is of that expanding species of expressed ideas that reveal just how far the thought processes of libertarians, classical liberals, and free-market conservatives are from those of the many persons who truly believe that champions of a liberal market order are either morons or monsters.
Upon reading “FranklinPierce”‘s comment I asked myself (without arriving at a satisfying answer): ‘What can this person possibly be thinking?!?!? How can he not see that a private employer, in employing workers, spends its own money, while enacting minimum-wage legislation is the categorically different action of legislators simply voting, and not spending their own money, to command third parties – here, employers – not to pay hourly wages below whatever is the minimum that these legislators decide to dictate?’
By the ‘logic’ of “FranklinPierce,” if you offer to pay a neighborhood teenager $20 to mow your lawn, I reveal myself to place a higher value than do you on the teenager’s labor if I unholster my gun, point my loaded weapon at your head, and promise to shoot you if you offer to pay this teenager any sum less than $30.
How can any person who successfully completed first grade fail to see that the ‘expression of value’ made by the person spending his or her own money in a voluntary transaction is not remotely akin to the ‘expression of value’ made by a third party who intrudes into the voluntary transaction with only a threat of violence and without putting anything of his or her own at stake?
Here’s a serious question: What does the above-quoted comment of “FranklinPierce” tell libertarians, classical liberals, and free-market conservatives about the priors and mindset of those persons who reject the analyses and oppose the policy positions of those of us who resist governmentalization of human affairs?
Some Links
David Henderson adds his clear voice to the critical assessments of Michael Lind’s recent uninformed attempt to portray libertarian opponents of minimum wages as scoundrels. Here’s David’s conclusion:
Lind generously throws around the word “lies” to refer to thoughts of people who disagree with him. I won’t reciprocate. But I will say that Michael Lind is very confused and that if you don’t notice his rhetorical switch, you will be too.
J.D. Tuccille argues that “Biden’s industrial policy promises a return to the 1970s.” A slice:
Industrial policy, by which governments guided, dominated, and usually mismanaged economic activity, was popular even in democratic countries up until around 1980, as Alberto Mingardi, director general of Italy’s free-market Istituto Bruno Leoni, recently pointed out.
“Industrial policy used to look so 1970s,” he wrote. In Italy, “government aid was generously showered on private business so that they would invest in ‘depressed areas,’ thereby ‘supporting communities’—to use more contemporary jargon—to create (manufacturing) jobs… The result wasn’t pretty. Private companies eagerly cashed in the subsidies, building what were later called ‘cathedrals in the desert’: big factories that were soon of no use, because when and if the subsidies expired, those businesses exited the south as speedily as they went in.”
Decades have since passed. That’s enough time for policymakers to forget—or never learn—that statist ideas have been tried and have failed.
“In recent years the notion of an ‘industrial policy’ has been revived, and it is now alive and kicking,” added Mingardi. “The Biden Administration’s ‘Chips Act’ is a clear case in point: industrial policy is evoked in order to answer a temporary shortage of supply, something even the most interventionist economist used to assume the market could manage by itself.”
Russ Roberts talks with Mike Munger about the perfect versus the good.
Here’s George Will on modes of dress. A slice:
[Jonathan] Clarke, who confesses a “slightly antique sense of propriety,” writes “few things are more heartening than to see a man or woman of advanced age very well dressed.” Such muted rebellion against what Clarke calls the “dubious new catechism of perpetual leisure” is not, as some might censoriously insist, the sin of asserting “privilege” in violation of the ethic of “inclusiveness.” Rather, it is a way to quietly assert that attention to one’s presentation is a form of respect for those to whom one is presented. And it is a way to acknowledge this: Because not all occasions are created equal, not all ways of dressing are equally appropriate.
The separation of powers is an animating principle of our nation’s founding documents. As the Constitution outlines, the U.S. has three distinct and coequal branches of government: a legislature that passes laws, an executive branch that implements them, and a judiciary that interprets them. This built-in division is meant to restrain government overreach and prevent abuses of power. The president and members of Congress regularly stand for election to ensure the government is accountable to the governed, and the judiciary serves in good behavior to ensure that justice is dispensed impartially.
While this sounds nice in theory, the federal government typically doesn’t honor it in practice. Congress has delegated much of its lawmaking authority to the executive branch since the 1930s. Federal agencies now issue regulations that have the force and effect of the law. “Administrative judges”—executive-branch employees—routinely preside over trial-like proceedings without juries, letting agencies act as both prosecutor and judge.
Under the Supreme Court’s Chevron doctrine, courts generally defer to the executive branch’s interpretation of the law—both in regulatory and enforcement proceedings. Many of the Constitution’s checks and balances, from the separation of powers to the right to jury trial, have fallen by the wayside.
Also writing in the Wall Street Journal is Charley Hooper, explaining “how the FDA helped fuel the opiod crisis.” Here’s his conclusion:
Toradol IV/IM is well-established, relatively safe and works about as well as morphine to reduce pain. It’s also nonaddictive and abuse-proof because it doesn’t provide an opioid “high.” What we really need is an oral formulation with the proper dose for use at home, at work and while traveling. Such a drug could help alleviate the opioid crisis.
If [FDA commissioner] Mr. [Robert] Califf is serious about doing everything to bring beneficial drugs to market, here is a perfect place to start.
Wall Street Journal columnist Allysia Finley is correct: “The lockdowns are over but the damage goes on.” Two slices:
Developing countries are seeing a resurgence of deadlier infectious diseases such as cholera, tuberculosis, measles and polio. In the U.S., young people are experiencing persistent problems that were aggravated by lockdowns including increased deaths, mental illness, drug overdoses and a detachment from the workforce. Call the phenomenon “long Covid lockdowns.”
Officials are trying to absolve themselves of responsibility for the post-Covid malaise by disclaiming the lockdowns. “Show me a school that I shut down and show me a factory that I shut down,” Anthony Fauci told the New York Times Magazine’s David Wallace-Wells last month. “Never. I never did.”
Dr. Fauci added: “Did we say that the elderly were much more vulnerable? Yes. Did we say it over and over and over again? Yes, yes, yes. But somehow or other, the general public didn’t get that feeling that the vulnerable are really, really heavily weighted toward the elderly.”
Is memory loss a long Covid symptom? Dr. Fauci told the American Society for Microbiology in August 2020: “We’d better be careful when we say, ‘Young people who don’t wind up in the hospital are fine, let them get infected, it’s OK.’ No, it’s not OK.” He added that young people “do get sick and symptomatic enough to be in bed for a week or two or three and then get better, they clear the virus—they have residual symptoms for weeks and sometimes months.” He repeated this ad nauseam to justify shutdowns even though he knew young people were at low risk of severe illness.
Dr. Fauci’s attempt to rewrite pandemic history recalls the classic “Seinfeld” episode in which George Costanza overreacts to a kitchen grease fire at a birthday party and mows down guests as he rushes to escape. “I was trying to lead the way. We needed a leader!” George cries in self-defense. “I was not leaving anyone behind!” The rush by Dr. Fauci and other public-health officials to shut down the economy has left hundreds of thousands of young Americans behind.
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The Trilliant analysis also found an increase in healthcare visits for anxiety disorders (48%), alcohol and substance use (27%) and depression (24%) between the first three months of 2019 and the same period in 2022. None of this is surprising, but it goes a long way in explaining why deaths among young people remain elevated even as Covid deaths have plunge.
Houman David Hemmati tweets: (HT Jay Bhattacharya)
COVID lockdowns caused far more harm than good and their effects will last for decades.
Bonus Quotation of the Day…
… is from page vii of economic historian Alexander Field’s 2022 book, The Economic Consequences of U.S. Mobilization for the Second World War:
It is easy to be novel and easy to be right, but much more difficult to be both.
DBx: Indeed so.
Unfortunately, the premium that too many intellectuals put on being novel trumps any worries they might have about not being right.
Quotation of the Day…
… is from page 233 of Randy Holcombe’s superb 2018 book, Political Capitalism: How Economic and Political Power is Made and Maintained (footnote deleted):
Regulation, more than other types of government intervention, invites corruption because regulation is explicitly designed either to force people to do things they would not otherwise choose to do or to prevent them from doing things they otherwise would choose to do. Those being regulated naturally have the incentive to try to offer benefits to regulators to lessen the effects of regulation, or to redesign regulations that harm them and pass regulations that help them. A bribe to a regulator benefits both the regulator and the regulated, opening a natural avenue for exchange. These bribes often are legal, pointing to the fine line between corruption and rent-seeking, but that fine line is perhaps only of academic interest when analyzing political capitalism. Indeed, the elite have every incentive to make such payments legal – a part of the rules under which the economy operates….
May 9, 2023
Michael Lind Slays A Minimum-Wage Straw Man
Here’s a letter to the editor of Compact:
Editor:
Michael Lind’s argument against minimum wages is woefully uninformed (“Libertarians’ Big Lie on Wages,” May 9th) – for at least four reasons.
First, despite Lind’s insinuation, opposition to the minimum wage isn’t exclusively libertarian; it’s economic. A majority of economic studies continue to find that minimum wages harm many of the low-skilled workers who are ostensibly meant to be helped.
Second, the lone example offered by Lind of an allegedly fallacious argument comes in a Forbes column by Tim Worstall from 2014. In the never-ending debate over minimum wages, is there really nothing more recent that’s worthy of the intellectual firepower of a pundit as penetrating as Mr. Lind?
Third, although this fact isn’t revealed in Lind’s screed, Worstall’s column is devoted to reporting the empirical results of a study that finds that minimum-wage hikes result mostly in higher prices of outputs produced by low-wage workers. Nevertheless, Lind does accuse Worstall of committing an error so egregious that it allegedly discredits all arguments against minimum wages.
What is this weighty error? On Lind’s telling, it’s Worstall’s out-of-touch belief that nearly all buyers of goods and services whose prices are pushed upward by minimum wages are minimum-wage workers themselves. But a fair reading of Worstall reveals that he, Worstall, is guilty only of poor wording. Here’s the paragraph of Worstall’s column quoted by Lind as a “gotcha!”:
And I would actually go further. It’s the low paid themselves, those on or near the minimum wage, who are generally the consumers of things made by other low paid, minimum wage, workers. So it’s not entirely obvious that they were all made better off after all. For while they might have higher wages, those low-paid workers are also those bearing the brunt of the newly higher prices.
Yet in the paragraph immediately prior to this one, Worstall writes this about the research finding: “Or you could look at it as I do and point out that everyone in the country has just been made worse off by those higher prices.”
Worstall explicitly says that the higher prices are paid by everyone.
Still, Worstall’s wording in the paragraph quoted by Lind is indeed careless. I happen to know Tim Worstall, and I’m confident that he meant to say that because minimum-wage workers purchase many of the goods and services the prices of which are raised by minimum wages – and because these workers’ incomes are well below average – these workers suffer from these price hikes burdens heavier than are the burdens suffered by higher-income workers.
Fourth and most fundamentally, even if Worstall is guilty as Lind charges, Lind is simply mistaken to assert that
[o]ne of the most common arguments against higher wages and benefits for low-income workers is the assertion that, while higher wages might make some workers better off, by making the goods and services that those workers provide more expensive, those higher wages will make other low-wage workers worse off as consumers.
In reality, the argument described here by Lind, far from being “one of the most common,” is an argument that almost never appears in the case made by economists – or by libertarians – against minimum wages. By far, the main and most common economic (and libertarian) argument against minimum wages is that these wages, by artificially raising the cost of employing low-skilled labor, price many low-skilled workers out of jobs. These workers are thus denied not only current incomes, but also – and typically more importantly – the job experience that would be the ticket for many of these workers to higher-paying jobs in the future.
Lind, in short, ignores the main argument against minimum-wage legislation.
Lind obviously enjoys fulminating against libertarians for opposing minimum wages. But if he wants his harangues to be taken seriously, he should at the very least get straight the essence of what he dismissively labels as the libertarian argument. Until he does so, he and his readers will thrill only to his slaying of a man made only of the most brittle of straw.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Bonus Quotation of the Day…
… is from Roger Koppl’s excellent new piece (published today) at Reason, “An international AI regulatory agency would threaten free speech, politicize AI“:
If you give experts power, they will abuse that power sooner or later.
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