Russell Roberts's Blog, page 36
March 22, 2023
Some Links
Jennifer Hernandez decries California’s climate hypocrisy. Two slices:
California’s new carbon-neutrality plan proudly promises to change “every aspect” of how people “live, work, play, and travel.” Blessed by what its authors call their “collective leadership and commitment to break away from ideas that no longer represent Californians’ values,” the plan conjures a future of new technology in pursuit of a greenhouse-gas-free future. Yet the plan offers not a single remedy for its own projections that climate policies will enrich the wealthy and hurt the state’s less affluent, heavily minority households.
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In keeping with this pattern, California policymakers have opted to pursue a far-reaching, multidecade climate blueprint for the state—one they admit will disproportionately harm people whom they deem disadvantaged. In text added just before the final plan’s adoption, bureaucrats disclosed that “households in lower income groups”—which includes all households earning $100,000 or less per year—will “see negative impacts, while households in higher income groups are anticipated to see positive impacts” from plan implementation. Even worse, the plan projects that since “more than 60% of households in the race/ethnicity categories of Hispanic, Black, and other minority communities are less affluent, these groups will “experience reduced income,” compared with mainly “White and Asian households” in higher income groups.
George Will explains “how government casually violates the letter and spirit of the First Amendment.” Two slices:
As long as the awful law exists, concerning which the Supreme Court will hear oral arguments on Monday, be careful what you say to, or write about, unauthorized immigrants. Congress, in one of the federal government’s increasingly frequent offenses against the First Amendment, makes it a crime if one “encourages or induces an alien to come to, enter, or reside in” this nation in violation of federal law. Let the formulation of hypotheticals begin in order to illustrate the law’s unconstitutional vagueness and overbreadth.
Suppose a pediatrician says an unauthorized immigrant’s child needs medical care that is available here but not in the country from which the immigrant came. Has a crime been committed?
According to the Migration Policy Institute, approximately 11 million unauthorized immigrants have been here for almost two decades. They are a declining portion of the growing U.S. population — 30 percent in 2007, 23 percent in 2018. And there is no reason to believe that Americans in their decency would tolerate the police measures that would be necessary to substantially reduce that number. Now, suppose you factually tell an unauthorized immigrant that his or her chance of being deported is small. Did you criminally “induce” that immigrant to “reside” here?
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The law in question provides enhanced penalties for people who encourage or induce illegal immigration “for financial gain.” Damon Root, who writes about legal matters for Reason magazine, published by the libertarian Reason Foundation, posits: Suppose an advocate of open borders writes a book arguing that restrictions on immigration are unjust and calling for unauthorized immigrants to remain, hopes for better policies, and fights for their rights. Selling such a book, Root writes, “would seem to violate the plain text” of the law at issue in Monday’s oral arguments in the case concerning Helaman Hansen.
Speaking of George Will, Jay Nordlinger recently spoke with him.
Financial regulators have ignored their post-2008 rule book to contain the latest banking panic. And on Tuesday Treasury Secretary Janet Yellen tore it up by announcing a de facto guarantee of all $17.6 trillion in U.S. bank deposits. Regional bank stocks rallied, but it’s important to understand what this moment means: the end of market discipline in U.S. banking.
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A stable financial system requires clear and transparent capital standards, sound regulation, and above all market discipline to punish reckless behavior. The current panic has shown that none of those exist in the U.S.
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The Administration is presenting its intervention as a one-off. But once regulators do something, they create the market expectation that they will do it again. And if they don’t, the ensuing market panic will invariably impel them. Biden officials are crossing a Rubicon here, and they’re doing it essentially by fiat without approval by Congress.
“The trouble with ‘elite’ law schools.”
Jacob Sullum warns of the “crusade against ‘malinformation.'” Two slices:
Last month, I noted that the Centers for Disease Control and Prevention had repeatedly exaggerated the scientific evidence supporting face mask mandates during the COVID-19 pandemic. Facebook attached a warning to that column, which it said was “missing context” and “could mislead people.”
According to an alliance of social media platforms, government-funded organizations, and federal officials that journalist Michael Shellenberger calls the “censorship-industrial complex,” I had committed the offense of “malinformation.” Unlike “disinformation,” which is intentionally misleading, or “misinformation,” which is erroneous, “malinformation” is true but inconvenient.
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In a federal lawsuit filed last year, the attorneys general of Missouri and Louisiana, joined by scientists who ran afoul of the ever-expanding crusade against disinformation, misinformation, and malinformation, argue that such pressure violates the First Amendment. This week, Terry A. Doughty, a federal judge in Louisiana, allowed that lawsuit to proceed, saying the plaintiffs had adequately alleged “significant encouragement and coercion that converts the otherwise private conduct of censorship on social-media platforms into state action.”
Tom Jefferson and Carl Heneghan defend the conclusions of the Cochrane study on masking. A slice:
There is no evidence from current randomised trials that masks make any difference. The only so called evidence ones from low quality studies which have been extensively used to prop up decisions already made or appease campaigners.
Writing at Slate, Jeff Wise reports on the truth about long covid. A slice:
The best available figures, then, suggest two things: first, that a significant number of patients do experience significant and potentially burdensome symptoms for several months after a SARS-CoV-2 infection, most of which resolve in less than a year; and second, that a very small percentage experience symptoms that last longer. I want to be clear about this: Long COVID is a real illness that has dramatically affected many people’s lives. But its prevalence does seem significantly less worrisome than originally thought.
Kulvinder Kaur tweets: (HT Jay Bhattacharya)
Lockdowns kill. Censorship kills.
Getting 19th-century American Economic History Right
Here’s the third in my series on Curtis Ellis’s effort to defend protectionism.
Editor, American Greatness
Editor:
When he argues that American economic growth in the 19th century was fueled by restrictions on imports, Curtis Ellis (in “An American System for America Prosperity,” March 18) confuses correlation with causation. The U.S. economy did indeed grow impressively during many of the years when Henry Clay’s protectionist “American System” – a ‘system’ highly praised by Ellis – was in place. But this fact is insufficient evidence that protection promotes growth.
First, despite its protectionism, the U.S. economy throughout the 19th century was largely free of government intervention – including, readers of American Greatness will be interested to learn, being free of restrictions on immigration. As noted by Dartmouth economist Douglas Irwin in his monumental history of U.S. trade policy, “the United States had an unusual policy mix: while it blocked the importation of some foreign goods, it offered virtually unimpeded entry to people, capital, and ideas into the country from abroad. In this sense, the United States was a very open economy in the nineteenth century.”*
It’s hardly surprising that, when left free, a people as entrepreneurial as Americans innovate and do commerce in ways that propel standards of living upward. And because America is a large country in both geography and population, the drag on economic growth created by obstacles to foreign trade was swamped and masked (although not eliminated) by the dynamism and enormous growth that was powered by that era’s economic freedom on the domestic front.
Common sense and economic theory tell us that the people of a nation cannot grow prosperous as a result of their government artificially restricting their access to goods and services. And sure enough, careful studies find that 19th-century U.S. economic growth was not fueled by protectionism. In his classic 1888 The Tariff History of the United States, economist Frank Taussig reached this conclusion:
In the main, the changes in duties have had much less effect on the protected industries than is generally supposed. Their growth has been steady and continuous, and seems to have been little stimulated by the high duties of 1842, and little checked by the more moderate duties of 1846 and 1857. Probably the duties of the last-mentioned years, while on their face protective duties, did not have in any important degree the effect of stimulating industries that could not have maintained themselves under freedom of trade….
We often hear it said that any considerable reduction from the scale of duties in the present tariff … would bring about the disappearance of manufacturing industries, or at least a disastrous check to their development. But the experience of the period before 1860 shows that predictions of this sort have little warrant…. In general, the extent to which mechanical branches of production have been brought into existence and maintained by the protective system is greatly exaggerated by its advocates; and even the character and direction of their development have been influenced less than, on grounds of general reasoning, might have been expected.**
What about later in the 19th century? After carefully reviewing the evidence, Doug Irwin concluded that there are
reasons to believe that import duties may have detracted from US economic performance. As already noted, tariffs on capital goods made investment spending more costly and less efficient. The high cost of basic iron and steel hampered the development of downstream industries, such as tinplate, and raised the cost of construction and transportation projects. In addition, protection tended to encourage the survival of smaller, less efficient firms in a given industry rather than larger, more efficient enterprises, thereby reducing an industry’s average productivity ….
In sum, it is difficult to make the case that high import tariffs were an important factor driving late nineteenth-century US economic growth.***
Taussig’s and Irwin’s conclusions square with Nobel-laureate economic historian Douglass North’s finding that “on balance, it is doubtful if the tariff promoted American industrialization much more rapidly than would have occurred in its absence, and it is even more doubtful that it resulted in any net addition to national income over this period.”****
None of the above is news to any informed economist. Yet nor will these facts persuade economic nationalists, whether left or right, of the folly of trying to enrich a nation by restricting trade; their minds are closed. But open-minded people must not be gulled by faulty historical tales into supporting protectionism.
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
* Douglas A. Irwin, Clashing Over Commerce: A History of US Trade Policy (Chicago: University of Chicago Press, 2017), page 279.
** Frank William Taussig, The Tariff History of the United States (New York: G.P. Putnam’s Sons, 1888), pages 153-154.
*** Douglas A. Irwin, Clashing Over Commerce: A History of US Trade Policy (Chicago: University of Chicago Press, 2017), page 284.
**** Douglass C. North, “The United States in the International Economy, 1790-1950,” in American Economic History, Seymour Harris, ed. (New York: McGraw-Hill, 1960), page 199.
Quotation of the Day…
… is from page 65 of the 2011 revised and enlarged edition of Thomas Sowell’s 2009 book Intellectuals and Society :
If, at a given time, three-quarters of the consumers prefer to buy the Acme brand of widget to any other brand, then Acme Inc. will be said to “control” three-quarters of the market, even though consumers control 100 percent of the market, since they can switch to another brand of widgets tomorrow if someone else comes up with a better widget, or stop buying widgets altogether if a new product come along that makes widgets obsolete.
DBx: When I was a young man, a large share of the market for devices used to create written documents was “controlled” by Smith-Corona – until it wasn’t.
March 21, 2023
Getting Adam Smith Right
Here’s the second in my series on Curtis Ellis’s laughably error-ridden effort to defend protectionism.
Editor, American Greatness
Editor:
In “An American System for America Prosperity” (March 18), Curtis Ellis joins the legions of protectionists who try to conscript Adam Smith into their ranks. And like these other protectionists, among Ellis’s means of conscription is to quote Smith out of context. Ellis, though, goes even further and actually puts words in Smith’s mouth.
Here’s Ellis’s offending passage:
Another case, Smith wrote, “in which it will generally be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry, is, when some tax is imposed on the [domestic industry.] In this case, it seems reasonable that an equal tax [i.e., tariff] should be imposed” on the foreign imports.
Minimum wage laws, environmental and workplace safety regulations, and Social Security and Medicare costs are examples of taxes imposed on American industry. Their costs are reflected in the price of goods produced in the United States. According to Smith’s doctrine, “an equal tax should be imposed upon” imports to level the playing field for American producers.
Well.
First, Ellis fails to mention that this quotation from Smith appears in that part of The Wealth of Nations where Smith identifies four exceptions to his preferred policy of unilateral free trade. Exceptions are just that: exceptions; they are not, contrary to Ellis’s presentation, Adam Smith’s endorsement of economic nationalism.
Second, by substituting in brackets “domestic industry” Ellis subtly but significantly changes Smith’s meaning. Here’s the actual quotation from Smith:
The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter.*
Contrary to the false impression created by Ellis, the home-government-created burden that Smith argued might justify a tariff is not just any burden that government imposes on domestic industry; instead, this burden is a particular tax on the domestic production of some particular produce of domestic industry.
In a passage not quoted by Ellis, Smith was explicit that the situation he here had in mind is that of “a particular commodity of which the price was enhanced by a particular tax immediately imposed upon it.” Not covered by this exception to a policy of free trade are taxes and other government interventions that cause a “general enhancement of the price of all commodities.”
Smith therefore, and without question, would reject Ellis’s claim that “[m]inimum wage laws, environmental and workplace safety regulations, and Social Security and Medicare costs” justify tariffs.
One reason Smith gave for confining this exception to particular goods the prices of which are raised by particular taxes specifically laid upon those goods is because only for such taxes “it might always be known with great exactness how far the price of such a commodity could be enhanced by such a tax.” And such “great exactness” of knowledge was important for Smith because his stated justification for a tariff under these circumstances is that it
would not give the monopoly of the home market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it.
Smith could not be more clear that he was not – contrary to the impression created by Ellis – arguing for tariffs to protect domestic producers from foreign competition.
The fact that in his attempt to justify protectionism Ellis gets Smith so very wrong is sufficient reason for great skepticism of all that else that Ellis writes about trade.
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
* All quotations from Smith are from Book IV, Chapter II of An Inquiry Into the Nature and Causes of the Wealth of Nations(1776).
Some Links
George Will spells out some of the troubling lessons of today’s bank rescues. Two slices:
Silicon Valley Bank ($209 billion in assets) was America’s 16th-largest bank, only 6.5 percent the size of the largest (JPMorgan Chase, $3.2 trillion) and 2.3 percent the size of the four largest combined ($9.1 trillion). Yet SVB’s death-by-mismanagement supposedly posed a “systemic risk” to the financial system? Joe Biden’s administration evidently thinks this system is as perishable as it believes the planet is. If everything is brittle, politicians have endless crises to justify aggrandizing their powers.
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Here comes capitalism without risk: profits private, losses socialized. Americans shall forgo the creativity of capitalism’s “creative destruction” by avoiding the destruction. Do not worry about moral hazard (incentives for risky behavior): Government will make Capitalism Without Hazard an entitlement for the innumerable entities government will deem too big to fail, for “systemic” reasons. This socialization of risk approaches a semi-nationalization of banking, so: Why should bank CEOs be paid more than civil servants?
The not-so-“transitory” inflation the government unleashed has increased for a third consecutive month; its annualized rate is triple the 2 percent target the Fed’s fine-tuners seek. SVB’s executives were inattentive to the predictable inflation that predictably punished their prediction of low interest rates for years to come.
Biden’s dreams of government growth require of Americans vast trust in government. This, despite evidence that:
Leaders of the National Institutes of Health worked surreptitiously to discredit the Great Barrington Declaration, in which epidemiologists correctly argued against blunderbuss lockdowns, and for pandemic responses targeting the most vulnerable, who did not include children. Disregarding their recommendations cost staggering sums and scarred a generation with learning loss.
The Centers for Disease Control and Prevention gave teachers unions cover as they avoided teaching and extorted benefits on spurious “public health” grounds. Government colluded with, and pressured, social media to suppress pandemic “misinformation,” as government defined this by its shifting criteria regarding the efficacy of masks, the necessity of commercial and school closures, a possible lab-leak origin of the coronavirus, and more.
Regulators are back to using their weekend bag of tricks in the name of ending a financial panic. Yet it doesn’t seem to be working very well. Perhaps that’s because in their frenzy the regulators are creating their own market risk with regulatory uncertainty.
That danger is coming into sharper focus as details emerge about this weekend’s rescue of Credit Suisse that was orchestrated by Swiss officials. The forced acquisition of Credit Suisse by UBS was supposed to calm markets, but Bern set off a tumult Monday in a $250 billion global market for bank bonds.
The upset arises because the Credit Suisse rescue will wipe out some 16 billion Swiss francs ($17.3 billion) in bonds that Credit Suisse had issued to cushion itself in case of a failure. Investors who bought those “additional Tier 1” or AT1 bonds understood the risk that their securities could be wiped out or converted to equity if Credit Suisse needed to be wound down. But under the terms of post-2008 banking regulations, equity investors are supposed to endure losses first.
Instead, shareholders are receiving three billion Swiss francs from UBS as part of the takeover, while the more senior AT1 creditors get zilch. This solves the political imperative to make sure someone, anyone, is wiped out in a bailout that includes nine billion francs of taxpayer guarantees for troubled assets. But the political fix has created a rule-of-law crisis that will bedevil the market for other banks’ AT1 bonds—at least until near-inevitable litigation over the Credit Suisse deal plays out.
Michael Faulkender and Tyler Goodspeed make the case for abolishing Dodd-Frank. A slice:
Efforts to make the U.S. banking system less risky have had the opposite effect. Since the 2008-09 financial crisis, the largest banks have started to look more alike. The stress testing mandated by the Dodd-Frank Act led banks to diversify in the same way, which elevated systemic risk even as individual banks became less risky. The collapse of Silicon Valley Bank is a case in point.
Diversification is an essential feature of a healthy financial system. If banks take different approaches to balancing risks, a loss in one’s portfolio is less likely to mean a loss in another’s. If one bank goes down in an economic shock, it doesn’t mean others will follow.
But a recent study from the Boston Federal Reserve found that banks that performed poorly on the mandated Dodd-Frank stress tests subsequently adjusted their portfolios such that they more closely resembled the portfolios of banks that performed well. The average institution’s portfolio is more diversified, but the system is more uniform. By requiring all of the biggest financial institutions to adhere to the same measures, pass the same tests and follow the same practices, America has lost diversification in the entire banking sector.
This means that if something brings down one major bank, others are more likely to fall, snowballing into a major financial system collapse. This could be set off by a macroeconomic shock—such as the worst inflation in 40 years—or by a regulatory mistake. Even a small error in government rules, such as model or parameter misspecification, will be multiplied across the entire financial architecture. And if the regulations contain plain bad policy, it could be systemic.
Mike Munger explains that the “minimum wage hurts whom it claims to help.”
Here’s the abstract of a new paper by Michael Strain and Jeffrey Clemens:
We develop new facts relating news coverage, interest groups, and events in the legislative histories of minimum wage increases. First, we create and validate a database of news articles that includes coverage of minimum wages and organized labor. Second, we show that policy changes predict increases in news coverage that connects organized labor and minimum wages, in particular when those articles reference high-profile interest groups and research output. Third, these policy events lead coverage of organized labor to shift towards articles about minimum wages. We observe that the minimum wage’s popularity with the public makes this shift qualify as “good PR,” an assessment that is supported by sentiment analysis of articles about organized labor. This public relations channel can thus help rationalize why interest groups engage in policy advocacy.
Eric Boehm is right: “John Bolton is still wrong about Iraq.” A slice:
It takes a special kind of hubris and a serious shortage of respect for the lives of other human beings to sit here, in the year 2023, and argue that the real problem with America’s post-9/11 wars is that they didn’t go far enough. The war in Iraq was a humanitarian and strategic disaster for the United States. It was “one of the most grievous errors in superpower history,” as Brian Doherty wrote in the March issue of Reason.” Mendacious in its beginnings, incompetent in its aftermath, and downright criminal in the death and civilizational wreckage it caused, the Iraq War was a catastrophe America has not yet properly reckoned with.”
Is America turning into Pakistan?
Laura Powell tweets: (HT Jay Bhattacharya)
The fact that many people pine for the return of lockdowns is why we can’t give up fighting until we have changed the laws and fixed the institutional rot that made them possible.
History Is Not Optional
A third button that I’d refuse to push, were it available, is one that would immediately eliminate the Federal Reserve. I’m convinced that we Americans would be far better off had we never had a central bank. But history isn’t optional. The Fed has been around for 110 years; it and its practices have long been thoroughly woven into the fabric of the American (and global) economy. Abruptly abolishing the Fed would rip enormous gashes into the complex fabric of financial-market relationships and expectations upon which the entire economy depends.
I’m certain that the economy can – and should – be fully extricated from the Fed, but such extrication must be done gradually to ensure that the process does little damage to financial markets. For practical proposals along these lines, I’d rely on such scholars as my George Mason University economics colleague Larry White, my long-time friend and banking scholar George Selgin, and other serious students of money and banking (which I am not).
There are, undoubtedly, still other unwise government interventions that I would wish to eliminate, but that I would also not willingly push a button to eliminate immediately.
But there are buttons I would push.
I would immediately eliminate all minimum-wage legislation. This legislation does, of course, result in some workers being paid wages higher than they’d be paid absent a minimum wage, but it also results in some other workers being involuntarily unemployed or, if employed, working at jobs that are excessively demanding and unpleasant. Even if minimum-wage jobs were evenly ‘distributed’ across age groups, the drop in the wages of some workers as a consequence of immediate minimum-wage abolition would cause only slight hardship compared to the almost-immediate benefits that would arrive in the form of new job opportunities for low-skilled workers.
Yet, in fact, minimum-wage workers are disproportionately young; fully 44 percent are younger than 25, meaning that these workers are less likely than are older workers to be heads of households. Further, only 1.4 percent of all American workers who are paid by the hour earn wages no higher than the federally mandated hourly minimum of $7.25. Moreover, a mere four percent of all employed 16-19 year olds earn wages as low as the federal minimum. These realities seal the case in favor of immediate elimination of this vile policy that prices many low-skilled workers out of jobs.
The fact that several states and locales have minimum wages higher than the federal minimum wage does nothing, in my view, to change this calculus: all minimum wages should be eliminated, as the gains to workers who would finally be able to earn income and to get valuable job experience would almost certainly swamp the slight fall in the earnings of some other workers.
Quotation of the Day…
… is from page 111 of Michael Shellenberger’s excellent 2020 book, Apocalypse Never: Why Environmental Alarmism Hurts Us All (footnote deleted):
In 1861, two years after [Edwin] Drake’s oil strike, Vanity Fair magazine published a cartoon showing sperm whales standing on their fins and dressed in tuxedos and ball gowns, toasting one another with champagne at a fine celebration. The caption read, “Grand ball given by the whales to celebrate the discovery of the oil wells in Pennsylvania.”
March 20, 2023
Getting Comparative Advantage Straight
This essay by Curtis Ellis is a monument to protectionist fallacies. I’ll write several responses, each to address the most alluring of these fallacies. (For alerting me to Ellis’s essay, I thank Nick Waller.)
Editor, American Greatness
Editor:
If there were an annual prize for Most Tendentious Argument, a likely winner for 2023 would be Curtis Ellis’s case for widespread protectionism in the U.S. (“An American System for America Prosperity,” March 18). Ellis weaves his case mostly from yarns of half-truths, misunderstandings, and downright fallacies.
Consider Ellis’s accusation that “today’s free-trade-über-alles lobby ignores the important premise underlying Ricardo’s theory [of comparative advantage]: he assumes capital will not cross national borders; it will stay in its country of origin.”
Ellis is correct about Ricardo’s assumption but incorrect about its implications. Contrary to Ellis’s conclusion, the validity and applicability of comparative advantage do not disappear, or even lessen, when capital is internationally mobile.
When explaining comparative advantage, Ricardo took as given the conditions that prevailed in the early 19th century, including the difficulty of investing capital abroad. The international immobility of capital kept countries with low worker productivity across all industries from receiving investments that would have raised that productivity. The result was that in some countries labor was less productive in all of its possible applications than was labor in other countries. This fact prompted many people to conclude that high-productivity countries cannot gain from trading with low-productivity countries. (Even today, of course, capital is not close to be mobile enough to equalize worker productivity across all countries.) By explaining comparative advantage, Ricardo exposed the error of this conclusion: Even if Portugal is more productive than is England at producing both wine and cloth, mutually advantageous trade is nevertheless possible if Portugal’s productivity advantage at producing one good (for example, wine) is greater than is its productivity advantage at producing the other good (cloth).
In other words, Portugal has a comparative advantage over England only at producing wine, while England has a comparative advantage over Portugal at producing cloth.
The upshot is that low-productivity England need not fear that it can’t ‘compete’ with high-productivity Portugal, and high-productivity Portugal need not fear that it can’t profit from trading with low-productivity England.
Increased international mobility of capital, while it changes the global pattern of comparative advantage, does nothing to nullify the logic of – or to destroy the existence of – comparative advantage. Only in a world in which every productive unit – every worker, firm, and country – can produce every good or service at the same cost as every other productive unit will there be no comparative advantage. And only in this practically impossible world there be also almost no incentive for any productive unit to specialize and trade. Obviously and thankfully, such a world is not ours.
As long as we witness people willingly specializing and trading, we can be certain that comparative advantage exists and, thus, ensures that the gains from this specialization and trade are mutual.
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
Quotation of the Day…
… is from page 57 of the 2011 revised and enlarged edition of Thomas Sowell’s 2009 book Intellectuals and Society (original emphases):
Contrary to [British Marxist Harold] Laski and many others with similar views, there is no given “sum to divide,” as there would be with manna from heaven. It is precisely the cooperation of capital and labor which creates a wealth that would not exist otherwise, and that both sides would forfeit if they did not reconcile their conflicting desires at the outset, in order to produce it. It is literally preposterous (putting in front that which comes behind) to begin the analysis with a “sum to divide” – that is, wealth – when that wealth can be created only after capital and labor have reconciled their competing claims and agreed to terms on which they can operate together in the production of wealth.
DBx: Yes. And yet many professors, pundits, and politicians continue to write and pontificate as if wealth rains down like manna from heaven, with human institutions and human actions playing at most a very minor role in its creation. The policy recommendations of professors such as Thomas Piketty and Gabriel Zucman, and of politicians such as Bernie Sanders and Elizabeth Warren, make sense (if we exclude the possibility that these people are sadists) only if these people truly believe that wealth is created largely independently of human institutions and actions.
I’ve said before and I’ll say again, many times: The market’s biggest failure is not that it occasionally ‘fails’ in those ways tediously described in economics textbooks; instead, the market’s biggest failure is that it works so successfully, smoothly, and quietly that people take its output for granted. The market thus conveys the appearance or sensation that wealth and economic growth ‘just happen.’ But, of course, wealth doesn’t ‘just happen.’ It must be produced. Daily. With creativity. Careful attention to details, including to the desires and quirks of fellow human beings as well as, of course, to prices. Risk-taking. Hours of toil, often long ones.
Recognition of the realities of wealth production renders silly the harangues against the “unequal” so-called “distribution of income” (or of wealth) in market economies. Unfortunately, too many people are happy to ignore reality in their rush to display what they falsely imagine to be their moral excellence.
March 19, 2023
Some Links
Arnold Kling reflects insightfully and in some detail on banking ‘regulation’ and the demise of SVB. Here’s his conclusion:
If I were in charge of designing financial regulation, rather than try to make the financial system hard to break, I would try to make it easy to fix. I sketched this out thirteen years ago.
But my approach would give less power to bureaucrats to channel credit and to see themselves as heroes who rescue the financial system from crises that those bureaucrats helped to create.
The economist Allan Meltzer liked to say that “capitalism without failure is like religion without sin. It doesn’t work.” After the 2008 financial crisis, Meltzer worried that bank bailouts were undermining public support for capitalism. He feared that politicians would steer the financial system toward more government regulation and away from the natural regulatory power of market competition. More Americans would begin to believe that only the state could protect them from the instability that comes with economic freedom.
Sure enough, in 2010 Congress passed the Dodd-Frank Act, which promised “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
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Mr. Hoenig calls the latest events “inevitable” given Dodd-Frank’s regulatory framework. He places much of the blame on the Fed’s use of “risk-weighted capital” to judge a bank’s health. This measure doesn’t account for “duration risk,” which got SVB into trouble. Long-term debt is sensitive to changes in interest rates. As rates rise, even safe assets like Treasury bonds decline in price, so that liquidating them entails large losses.
SVB “had billions of dollars of assets that were rated risk-free or low-risk from a credit perspective, but they were not duration-risk-free,” Mr. Hoenig says. “SVB’s ‘risk-weighted capital’ focused almost exclusively on credit risk. Meanwhile, duration risk was screaming danger.”
The original sin is monetary policy, Mr. Hoenig says. When he was a voting member of the Fed’s Open Market Committee in 2010, he was often a lonely dissenter. While most of his colleagues cheered near-zero rates for years, he argued for gradually returning the price of credit to something normal. By not normalizing rates, the Fed was fueling ever-greater risk-taking in search of yield. Now, in an effort to control inflation, the Fed has raised the fed-funds rate by 450 basis points over the past year, exposing this policy error.
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In reflecting on how we got the current panic, Mr. Hoenig sounds like Allan Meltzer. “One of the worst things I think that’s happened, and I’ve watched,” he says, is that “market discipline has atrophied. There is none.” Regulators keep insisting that the banks are “very, very sound.” He allows that bank capital is “certainly better than in 2008.” But “better isn’t adequate,” as we’ve again learned the hard way this week.
Here’s part 24 of George Selgin’s important series on the New Deal and recovery. A slice:
There are few more successful examples in history of the propaganda technique known as the “big lie” than the charge that Herbert Hoover was a “do nothing” president. In fact, Hoover was being perfectly truthful when, in the course of the ’32 campaign, he said. “We might have done nothing. … Instead, we met the situation with … the most gigantic programs of economic defense and counterattack ever evolved in the history of the Republic.” So, for that matter, was his opponent, who accused the Hoover administration “of being the greatest spending administration in all our history” (Lyons 1948, 287). On public works alone, the Hoover administration spent more than the previous nine administrations combined, notwithstanding that their undertakings included the Panama Canal (ibid., 269). No previous administration, David Kennedy (1999, p. 48) observes, ever “moved so purposefully and so creatively in the face of an economic downturn.”
Robertas Bakula describes “the dark magic of promotio competitio.”
Juliette Sellgren’s latest guest on her podcast, The Great Antitdote, is Timothy Sandefur.
Dan Hannan makes the case against retaliatory trade restrictions. (HT Iain Murray)
Theodore Dalrymple warns of health totalitarianism. A slice:
While epidemiological investigations are clearly important and valuable, they have their dangers, as perhaps the response to the COVID-19 pandemic demonstrates. During this pandemic, the distinction that Frederic Bastiat so brilliantly pointed out in the 1840s, between the seen and the unseen, was lost sight of: and the fact that locking down whole societies to prevent an illness from spreading to people in whom it would do little harm might have very serious consequences was ignored by many epidemiologists. They were like people who would halt all traffic because traffic results in accidents.
Michael Shellenberger tweets: (HT Jay Bhattacharya)
Humans understood natural immunity hundreds of years before believing Earth revolved around the sun. And yet the US government censored American citizens who pointed to the scientific studies proving natural immunity also worked against Covid.
It’s their sheer smallness that is so striking. Their banality. Their triteness. I had hoped, reading The Lockdown Files, to find some explanation for the miseries that were inflicted on us in 2020. Perhaps decisions that looked imbecilic to the rest of us might make sense to those in the control room, able to survey information that we could not see. Perhaps there was a grand plan.
But not a bit of it. What we see in the leaked WhatsApp messages are petty, frightened men at the mercy of events. They obsess over tweets and news reports. They fret about how they are coming across.
Again and again, decisions are made for presentational rather than medical reasons. Quarantine could safely be cut from 14 to five days; but the problem, says Matt Hancock, is that this would “imply we’ve been getting it wrong”. “Imply”?
…..
What we see is not a bad man, but a well-intentioned man caught up in a machine that might have been deliberately programmed to generate bad outcomes. Britain was driven into abandoning its proportionate, cool-headed epidemic plan, not just by shrieking TV presenters, but by perverse incentives. Put simply, decision-makers knew that they would not get into trouble for excessive caution. They could blow away billions, bankrupt businesses, ruin children’s education, and none of it would be a resigning matter. But make the slightest mistake the other way, and they would be done for.
Easy to say in hindsight? Maybe. But those of us who said it at the time were roundly denounced as granny murderers. In February 2020, I recalled the ridiculous forecasts that had accompanied bird flu and swine flu, and cautioned against panic: “Politicians, like most people, are bad at calculating risk, and almost every minister would rather be accused of over-reacting to a threat than of having done too little. There is a similar bias, albeit a less pronounced one, among the various medical advisory bodies”.
…..
Why, then, were we panicked? What happened to the original epidemic plan, which was to allow infections to seep gradually through the population so that hospitals would not be overwhelmed at any one moment?
The answer can be glimpsed in a message on March 8 from James Slack, Boris Johnson’s calm and measured spokesman: “I think we’re heading towards general pressure over why our measures are relatively light touch compared to other countries.”
Too bloody right. And the pressure – cretinous rants from Piers Morgan, false rumours of hospitals being overrun, “Go Home Covidiots” signs – grew until, two weeks later, a prime minister who hated nannying with every bone in his body felt obliged to sentence the population to house arrest.
Could he have resisted that pressure? Other countries had already closed, 92 per cent of the electorate wanted to be confined and the scientific advisers, sniffing the wind, had switched to arguing for tougher measures.
But one country held out. Sweden, lacking its own pandemic plan, had adopted Britain’s – and, unlike Britain, it did not crack under criticism. Sweden is our counterfactual, a laboratory quality control showing what would have happened here had we held our nerve. And the evidence it presents looks damning. A study has found that, from 2020 to 2022, Sweden had the lowest excess mortality rate in Europe.
…..
During the pandemic, I assumed that Sweden would emerge with a slightly higher death rate, but a much stronger economy. Since poverty correlates with lower longevity, I expected that, over time, Sweden would see fewer deaths from other causes, so ending up healthier as well as wealthier. But I underestimated the lethal impact of the lockdowns themselves. Sweden did not just do better over time; it actually killed fewer people during the pandemic.
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