Russell Roberts's Blog, page 28

Why America Runs Trade Deficits

(Don Boudreaux)

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In agreeable response to this recent Cafe Hayek post in which I push back, yet again, against uninformed fretting about U.S. “trade deficits” (so-called), Tim Worstall sent the following observation (which I share here with Tim’s kind permission):

Americans create wealth faster than they sell it. That’s why Americans keep getting richer.

Some Links

(Don Boudreaux)

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Mike Munger ponders manners and the Coase Theorem.

Also pondering Coase and the web of social connections that binds strangers together is my GMU Econ colleague Bryan Caplan. A slice:

Suppose you’re at the local mall. You’ve never met 99.9% of the other shoppers. But you’re all customers of the same shopping center. Each of you “knows a guy who knows a guy” – or to be more precise, each of you knows a business who knows each of the other customers. As a result, the mall managers have a clear incentive to manage the mutual externalities of all the folks at the mall. Though you have no direct relationship with the other customers, the mall managers have direct relationships with each of you. If you talk loud or smell bad, it’s bad for the other customers, which is bad for the mall, which is bad for business: “Sir, I’m afraid I’m going to have to ask you to leave.”

The same goes in an apartment complex. You might never even see your immediate neighbors. The apartment owner, however, does business with each of you. So if you bother your neighbors with loud music, you are indirectly bothering the owner. Which gives him a clear incentive to involve himself. Maybe he’ll ask you to turn down your music. Maybe he’ll plan ahead and make the walls sound-proof. Whatever the owner does, he has a strong reason to take all of his future tenants’ interests into account. After all, if he fails to provide good quality of life, he’ll have to cut his rents to fill his units.

Here’s the abstract of a new paper by Michael Strain and Jeffrey Clemens:

Over the past decade, organized labor has played a significant role in advocating for minimum wage increases. Why might this be, given that the minimum wage may act as a substitute for the bargaining power offered by labor unions? In this paper, we study the interplay between minimum wages and union membership. We estimate that each dollar in minimum wage increase predicts a 5 percent increase (0.3 pp) in the union membership rate among individuals ages 16–40. Consistent with a classic “free-riding” hypothesis, however, we find that minimum wage increases predict declines in union membership among the minimum wage’s most direct beneficiaries. Instead, increases in union membership occur among much broader groups that are not directly affected by the minimum wage.

Jeffrey Miron and Jacob Winter argue that “the Trump indictment reminds us that campaign finance regulation should not exist.”

J.D. Tuccille warns that the U.S. government will use the recent intelligence leak as a pretext to further surveil and control us. A slice:

Another day, another government blunder used as an excuse to tighten the screws on the public in hopes of reducing the fallout from official incompetence. That’s a fair takeaway from efforts by the Biden administration and security agencies to lean on the media for reporting the contents of the recent intelligence leaks, and to plan expanded internet surveillance to catch inevitable future leakers.

Tom Slater reflects on the BBC’s recent interview-gone-bad with Elon Musk. A slice:

Elon Musk has become a bête noire of the new elite, all because he says he wants to make Twitter a more free and open forum. This has particularly appalled the journalistic set. In our populist, social-media age, mainstream journalists have come to the horrifying realisation that they are no longer the gatekeepers of information and truth – not least because their hysterical antics post-2016 have bred so much public suspicion of them. So, in the years since Trump and Brexit, they have taken to demanding that tech firms clamp down on deplorables and dissidents. And ever since Musk bought Twitter last year, pledging to pare back its censorship regime, establishment journalists have become apoplectic.

Steve Templeton reflects on the covid response. A slice:

When the pandemic hit, it was obvious to many that immune-suppressed and other vulnerable people might fare a lot worse than healthy individuals. Early evidence confirmed it. It thus made sense to focus our efforts on those vulnerable people, because that would cause the least collateral damage.

But that didn’t happen. Instead, many states and countries pursued a disastrous strategy of “Zero COVID,” resulting in much collateral damage for no consistent benefit. Many nations that went this route are now seeing significant increases in mortality. Maybe excess mortality could be put off, but not eliminated, like the virus itself.

School closures in the United States had no effect on community spread of the virus, and caused tremendous harm to children, resulting in a shocking loss of learning, skyrocketing BMI, and increased abuse along with plummeting mental health. In this case, no special group was accomodated. The unique problems of a few became everyone’s problem, with no benefit.

The desire for equal outcomes has always been problematic, because it runs completely contrary to reality and human nature. No matter how you slice it, not everyone is going to get a trophy or benefit from a shared sacrifice. Not everyone needs to share the unique challenges of every demographic.

Number 99 tweets: (HT Jay Bhattacharya)

Jeremy Faust is right in line with Bay Area former County Health Officer Erica Pan who said lockdown would be easy because Californians had DoorDash (you cannot make this stuff up).

Quotation of the Day…

(Don Boudreaux)

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… is from page 179 of my colleagues Virgil Storr’s and Ginny Choi’s excellent 2019 book, Do Markets Corrupt Our Morals?:

While everyone appears to equally trust those at a short social distance (i.e. trust in family and neighbors) in both market and nonmarket societies, trust appears to deteriorate as social distance increases and appears to deteriorate quicker in nonmarket societies…. Stated alternatively, people around the world seem to have equally strong core networks, but those living in market societies seem to have stronger periphery networks.

Hmmm…. I Wonder Why People Are Losing Confidence in the Media

(Don Boudreaux)

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Here’s a letter to the Washington Post:

Editor:

If you’re looking for reasons why so many people today distrust the legacy media, look no further than yesterday’s report, by Dan Diamond, headlined “Covid is still a leading cause of death as the virus recedes.”

Here, apparently, is important news that’s both surprising and sobering.

Yet when one clicks on the link to the Peterson-KFF Health System Tracker site that Mr. Diamond uses to justify his report that covid remains a leading cause of death, one discovers that the data stop on October 31st, 2022. That’s nearly six months ago – a long stretch in covid-time.

Even more damningly, the same Health System Tracker page features this tidbit:

So far in 2022 in the U.S., COVID-19 is the number 3 cause of death (through September). However, about half of COVID-19 deaths in 2022 thus far occurred in January and February of the year.

So not only do the data used by Mr. Diamond as his basis for reporting that covid remains in April 2023 a leading cause of death end in October 2022, the very site that he relies upon for these data explicitly notes that a disproportionately large number of 2022’s covid deaths occurred in January and February of that year – evidence that throughout 2022 covid’s lethality waned. This trend surely continued into 2023.

In short, Mr. Diamond’s very own data source supports neither his insistence that covid remains a leading cause of death, nor his suggestion that Americans today are foolish to have stopped cowering in fear of the virus.

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

Industrial Policy Does Indeed Fall Victim to the Knowledge Problem

(Don Boudreaux)

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In my latest column for AIER I argue that the knowledge problem, as identified long ago by Ludwig von Mises and F.A. Hayek in their demonstrations that socialism cannot work as advertised, also fatally afflicts industrial policy. A slice:

The fact that some national conservatives deny that their goal is economic efficiency reveals only that they fail to grasp economists’ meaning of efficiency. Were they to grasp this meaning they’d understand that “efficient allocation of resources” means ‘that allocation of resources that achieves the maximum possible satisfaction of human wants.’

And so [Alex] Salter is correct when he observes, about the increased factory work and more factory output demanded by national conservatives, that “[d]irect subsidies, tax credits, and similar policies are fully capable of achieving this.” But he’s incorrect to suppose that the story ends there. The story ends only when we determine if these engineered increases in factory work and output are indeed worth their costs, for only if this juicing-up of the manufacturing sector is reliably determined to be worth its cost can industrial policy truly be said to yield an improved economy.

Because industrial policy necessarily ignores market prices, however, there is no way for the designers of industrial policy, or for the mandarins who implement it, to know if the value of their engineered outcomes — here, more factory work and more factory output — exceeds or falls short of the value of the goods, services, and economic opportunities that are unavoidably sacrificed to achieve those outcomes.

When government engineers more resources into the building, equipping, and supplying of the particular kinds of factories favored by industrial-policy officials, we must ask: From where do these resources come? Some almost certainly come from other would-be manufacturing operations, while others come from the service sector. But no one can know any of these details. Yet even if we did know that, say, X tons of steel and Y hours of labor were diverted away by industrial policy from the service sector (say, from the building and staffing of medical-research facilities and online-retail distribution centers), how can we know that this altered allocation of resources will redound to the country’s net benefit? How can we know that the value of the output thereby lost from these service-sector operations isn’t greater than the value of the output thereby made possible in the manufacturing sector? How can we know that the particular jobs thereby destroyed in the service sector are inferior to the particular jobs thereby created in the manufacturing center?

We can’t know. No one can. There is literally nothing that tells anyone that the net result will be economic improvement for the country. Indeed, the only real knowledge we have when the reallocation of resources is first brought about is that, at least at that time, the market puts a higher value on the service-sector outputs that will no longer be produced than it puts on the additional manufacturing-sector outputs that will now be produced. We know this to be true because, were it not true, market participants themselves would have directed those resources away from the service sector and into the manufacturing sector.

In the face of this reality, industrial-policy champions have only two possible responses if they wish to defend industrial policy as being good for the country. One response is that the market is unreliable and its knowledge distorted. To those persons who offer this response it’s important to put this question: how do you know? What source of knowledge do you have that tells you with sufficient clarity that the knowledge conveyed by market signals is so defective that a government-engineered resource reallocation will improve the welfare of the people of the country?

If you ask this question you’ll get no good answer. Proponents of industrial policy ultimately are guided only by their personal tastes, preferences, prejudices, and hunches.

A second possible response from industrial-policy proponents is to concede that market prices and asset values accurately reflect today’s relative valuations of different outputs and resource scarcities, but then to assert that these prices and asset values reflect only current preferences and knowledge; because (the response proceeds) people today don’t fully appreciate how much better the economy would be with a different pattern of resource use and mix of economic outputs, today’s prices tell us nothing about what the ‘correct’ pattern of resource allocation should be tomorrow. Industrial-policy proponents insist that when government reallocates resources in accordance with industrial-policy plans, only then will market participants come to realize how much better the new resource-allocation pattern is compared to the pattern that would arise absent government intervention.

To this response, too, it’s important to ask the industrial-policy proponent: how do you know? What source of information do you have to assure you that you know better than do your countless fellow citizens, who today spend and invest their own money, what will be best tomorrow for these fellow citizens, nearly all of whom are to you strangers? Again, you’ll get no answer that satisfies. Whatever answer you do get will, upon examination, be seen to amount only to this: “I just have a feeling that I’m right that my industrial policy will improve the country!”

Some Links

(Don Boudreaux)

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Telegraph columnist Allison Pearson rightly delights in Elon Musk’s verbal manhandling of a presumptuous and nitwitted BBC interviewer. A slice:

Even better for sheer comic embarrassment, I reckon, is the interview the BBC’s North America Technology reporter, James Clayton, did this week with the world’s second-richest man and Twitter CEO Elon Musk. Generally, when a journalist is preparing for an encounter of that importance, you really do your homework. Young Clayton thought it was sufficient to turn up with a bunch of lazy, Leftist assumptions which probably quite accurately represent the groupthink in the BBC newsroom. Elon Musk had other ideas.

Clayton pointed out that Musk had sacked a lot of “content moderators” at Twitter. “There’s not enough people to police this stuff, particularly around hate speech,” he chastised.

“What hate speech are you talking about?” asked Musk amiably. “You use Twitter. Do you see a rise in hate speech? I don’t.”

“Personally, on my For You [page], I would get more of that kind of content, yeah, personally,” burbled Clayton incoherently.

Musk pushed back: “You see more hate speech personally? Content you don’t like, or what?” The Twitter boss challenged the man from the Beeb to “describe a hateful thing”.

Clayton: “You know, just content that … may include something that is slightly racist or slightly sexist.”

As flies to wanton boys are junior reporters to tech titans. They kill them for their sport. “So, you think if something is slightly sexist it should be banned?” Musk mused lethally.

“No, I’m not saying anything,” protested Clayton, by now dimly aware (very dimly, no John Simpson he) that prey had turned predator.

Musk challenged the journalist to name just one specific example of the content he claimed to have been offended by. Panicking, the reporter executed a screeching U-turn. Clayton had stopped using the Twitter For You page for the past few weeks, he said.

“So, how could you see that hateful content?… Sir, you don’t know what you’re talking about. You can’t even give me a single example … not even one tweet and yet you claimed the hateful content was high. That’s a false. You just lied!”

Oh, wow. Checkmate, Elon Musk.

The Wall Street Journal‘s James Taranto patiently and thoroughly exposes the fallacies and half-truths in ProPublica’s attempt to discredit Justice Clarence Thomas. A slice:

That implies that Justice Thomas never disclosed his interest in the Savannah house where his mother lived. But he didn’t need to. “Information pertaining to a personal residence is exempted from reporting, unless the property generates rental income,” the filing instructions say on page 33. Nor was there any requirement to disclose the ownership of the other two Savannah properties after the houses were demolished. Who wants to rent an empty lot in Savannah?

When an asset isn’t sold but stops being reportable—in this case because it is no longer capable of generating rental income—page 50 of the filing instructions directs the filer to “insert ‘(Y)’ after the asset description in Column A and leave Columns B-D blank, or include an explanatory note in Part VIII.” Justice Thomas did exactly that for the Savannah rental properties in 2010, and for the Liberty County property in 2015. The latter footnote reads simply: “Line 1: The asset listed on line 1 does not receive any rental income for this property.” This is the disclosure Ms. Canter and her co-signers mistake for a deception.

When my mother died in 2019, I inherited a one-third interest in her house, which I sold to my brother. I understand the statute to mean that if I had been a federal judge, I would be obligated to disclose that transaction. But if I hadn’t been made aware of the statute, it wouldn’t have occurred to me to think of my inheritance as an “investment,” and I searched the filing instructions in vain for language that makes plain a judge’s duty to disclose this sort of transaction.

George Will isn’t optimistic about the short-run prospects of class fluidity in America. Here’s his conclusion:

Speaking of vehicles, there is a cultural variable that is pertinent to political predictions. For more than 40 years, the Ford F-Series truck has been the nation’s best-selling vehicle — not just the best-selling truck. Do you own one or know anyone who does? If your answer is “yes,” or if it is “no,” you probably are a member of, and a stranger to, a large American (if you will forgive the expression) class.

In this year, the 300th anniversary of the birth of Adam Smith, National Review‘s monthly 2023 series on the great Scot continues with an essay by Yuval Levin. A slice:

We tend to think of Adam Smith’s lifelong project as offering a description of human relations and passions and an argument for markets. But as some of his earliest American readers understood, Smith often takes the commercial economy as a given, and looks to convince us to choose a virtuous life. He was plainly a champion of the market economy, for its ability to improve both wealth and dignity. But it was in the realm of moral philosophy that he seemed to think persuasion was most necessary.

Hans Bader reports on the continuing, fast spreading on campuses of wokeism.

Wall Street Journal columnist Andy Kessler is rightly skeptical of much philanthropy. A slice:

At its best, lots of philanthropy is very useful, but may not be sustainable over time—a sugar high that rarely enables that “teach a man how to fish” thing. Effective altruism may be an oxymoron. And it’s hard to miss that much of philanthropy is to fix government failures in education, welfare or medicine. I think that was Bono’s point.

But at its shadiest, philanthropy drives the misallocation of capital, overvaluing professors, the U.N. and climate poets and undervaluing those who can productively increase societal wealth to fund solutions to the future’s harder problems.

If only there were a way to use capital to provide opportunity, train workers, pay middle-class wages, help people build wealth … wait, it just came to me. How about starting new companies and investing in entrepreneurs and world-changing technology? Sure, that’s “a hazardous journey,” but so what? Actually, part of OpenAI is now a for-profit. Yes, it turns out the perfect cure for the flaw in capitalism is, voilà, more capitalism. You may not get that warm fuzzy feeling or media adulation—in fact, you’ll likely be labeled greedy—but you might fund future economic powerhouses. Scolds will throw shade. Ignore them.

Juliette Sellgren talks with GMU Econ alum Mark Calabria about his new book, Shelter From the Storm.

Robert Dingwall explains that “face-mask evangelism has undermined trust in science.” Two slices:

Second, for trust in science. The Covid lockdowns revealed a nasty streak of authoritarianism in some medical circles. Many commitments made by leading medics and scientists in the past 30 years to public dialogue, engagement and partnership were binned in favour of a false certainty and a simplistic read-off from science to policy. Public-health leaders used to see their role as educators, acknowledging uncertainties. “Do as I say” is not a good way to build trust, let alone being nudged by subliminal pressures to comply rather than question.

…..

The lack of rigorous research on masks stands for the wider policy failures of a state that has excessively privileged expertise from the medical and natural sciences without recognising that its impact always depends on its translation into actions by ordinary citizens.

Vinay Prasad talks with Carl Heneghan and Tom Jefferson.

Quotation of the Day…

(Don Boudreaux)

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… is from page 267 of Thomas Sowell’s 1999 book, Barbarians Inside the Gates:

Some people are such masters of the half-truth that it would be a waste of talent for them to lie.

Debunking Yet Another False Tale Told About American Trade Deficits

(Don Boudreaux)

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Here’s a letter to the Director of the Claremont Institute Center for the American Way of Life. (I thank Scott Lincicome for alerting me to the essay by David Goldman.)

Director:

David Goldman’s “Restoring American Manufacturing: A Practical Guide,” which you published on February 21st, is a stampede of economic misunderstanding and factual errors.

An especially egregious misunderstanding occurs when Mr. Goldman portrays the U.S. trade deficit as resulting from American’s selling assets to buy imports. This impoverishing practice, on Mr. Goldman’s telling, is going on now in America.

It is indeed possible for the people of a country recklessly to increase their consumption today – and thereby ensure their impoverishment tomorrow – by selling off their assets to the people of other countries in exchange for imports. And such recklessness would cause the country to run trade deficits. But contrary to Mr. Goldman’s apparent assumption, trade deficits can be caused by other, quite different economic forces – forces that are beneficial rather than malignant. Such is the case with U.S. trade deficits.

U.S. trade deficits arise because foreigners invest in the U.S. some of the dollars they earn on their export sales to Americans rather than spend all of these dollars immediately on purchases of American exports. Because the size of neither the world’s nor any country’s capital stock is fixed, such foreign investment can expand America’s capital stock (in part by offsetting its diminution by our fiscally irresponsible government). If this expansion of our capital stock is in fact occurring, we Americans are made wealthier, not poorer. Increased savings and investment in America by non-Americans makes us wealthier no less than does increased savings and investment in America by Americans.

If U.S. trade deficits are caused (as Mr. Goldman supposes) by Americans recklessly selling off assets to foreigners, rather than by foreigners prudently taking advantage of productive investment opportunities in America, we Americans would by now be desperately poor. After all, the most recent year that America ran a trade surplus saw the Oval Office occupied by Gerald Ford. But instead our net wealth has since then risen.

In 1987 (the first year for which I can find consistent data) total net worth of American households was, in 2022 dollars, $38.31 trillion. Today (2022) total net worth of American households is $139.87 trillion. Therefore, in the past 35 years the inflation-adjusted net worth of American households rose by 265 percent. On a per-household basis over these same years, inflation-adjusted household net worth rose by nearly 150 percent, from $428,143 to $1,066,053.*  Also, real median household income today is higher by at least 19 percent, which is almost certainly an underestimate. (See the Gramm, Ekelund, and Early book mentioned below).

What about American businesses? In 2022 dollars, the net worth of nonfinancial corporations in the U.S. rose from $11.049 trillion in 1987 to $30.895 trillion in 2022.** That’s an increase of 180 percent.

More generally, as detailed in the data-rich 2022 book by Phil Gramm, Robert Ekelund, and John Early (The Myth of American Inequality), Americans – and especially ordinary and poor Americans – have thrived economically in recent decades.

The data utterly debunk the tale told by Mr. Goldman about U.S. trade and trade deficits.

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

* Figures on household nominal net worth come from this St. Louis Fed page; these nominal figures are adjusted for inflation using the Personal Consumption Expenditure price index. Data on the number of U.S. households come from Statista.

** Figures on nominal nonfinancial corporate net worth come from this St. Louis Fed page; these nominal figures are adjusted for inflation using the Personal Consumption Expenditure price index.

Quotation of the Day…

(Don Boudreaux)

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… is from page 30 of Thomas Sowell’s October 4th, 1985, column “Envy and ‘Social Justice’,” as this column is reprinted in Compassion Versus Guilt, a 1987 collection of some of Sowell’s essays:

Envy used to be one of the seven deadly sins. But now it is the prime political virtue, under its new name – “social justice.”

Which Proponents of Capitalism Believe Themselves NOT to Promote the Common Good?

(Don Boudreaux)

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Here’s a letter to The American Conservative.

Editor, The American Conservative

Editor:

My friend Alex Salter argues that we should embrace “common-good capitalism” (“The Quest for Common Good Capitalism,” April 15). In doing so, he insists that “common-good capitalism” is something new – a capitalism different not only from all varieties of socialism, but also from, on one hand, “regulated capitalism” of the sort familiar today to Americans and western Europeans, and, on the other hand, presumably from the sort famously championed by classical-liberal scholars such as F.A. Hayek and Milton Friedman.

I say “presumably” because Alex never explicitly identifies capitalism as championed by Hayek and Friedman as a variety of capitalism inferior to the “common good” upgrade. This omission is fatal given that the least alloyed and most famous form of capitalism is that which was explained and supported by scholars such as Hayek and Friedman (and today most vigorously by Deirdre McCloskey) – scholars who, by the way, believed that the capitalism they supported served the common good. Alex’s case is only further weakened by his failure to do more than list “common-good capitalists’” aspirations; to readers of his essay, the substantive details about how the operation of “common-good capitalism” differs from the operation of the capitalism of Hayek and Friedman remain a mystery.

To encourage people to embrace “common-good capitalism” as something that’s both new and superior to all other varieties without identifying a single alleged problem with capitalism as understood and endorsed by classical-liberal scholars such as Hayek, Friedman, and McCloskey is to encourage people to reject the most profound case for capitalism yet to be offered in favor of a policy defined only by aspirations as vague as they are banal and marketed under a platitudinous name.

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