Russell Roberts's Blog, page 425

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(Don Boudreaux)

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Ed Stringham rightly applauds John Ioannidis.

Art Carden – citing, among others, Jim Buchanan, Gene Epstein, and Jim Otteson – warns against the all-too-common habit of thinking of the state as a great mind. A slice:

States are very good at identifying a well-defined problem and rendering a system legible to its functionaries. This is not the same thing as identifying the right problem (or set of problems) and providing anything approximating the “right” solutions. It is just finding something for powerful people to measure and control. In the process of making things legible, states give short shrift to other problems that are extremely important but that are outside the scope of their interest. If the goal is “stop the spread of COVID-19 at all costs,” then an authoritarian lockdown seems like a pretty obvious solution. Once you relax the “at all costs” part of the goal, things become much less clear. At a fundamental level, it looks like the theorists and practitioners who have slammed on the brakes of the free society are committing what the philosopher James Otteson called “the Great Mind Fallacy” in a 2010 paper in the journal Social Philosophy and Policy.

My Mercatus Center colleague Christine McDaniel notes the irony of how today’s imploding economy is shrinking the U.S. trade deficit.

Arnold Kling warns that what he calls “lockdown socialism” isn’t sustainable.

Ron Bailey is a very careful science writer. Let’s hope that this study on which he reports is true.

And here’s a recent report from Sweden. (HT Eric Mack)

My GMU Econ colleague Dan Klein explores the meaning of gratitude, and of expressions of it.

Quotation of the Day…

(Don Boudreaux)

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… is from page 357 of the original edition of James M. Buchanan’s 1960 textbook, The Public Finances (a book that isn’t included in Buchanan’s Collected Works):

Taxation is imposed on individuals compulsorily, supposedly in exchange for the government’s direct provision of public service benefits from the expenditure. Borrowing, in contrast, represents a voluntary exchange through which private people give up purchasing power in exchange for the government’s promise to return to them income in future periods. Taxation, therefore, imposes a burden of payment for public services directly on the individual present during the time that the expenditure is carried out. Public borrowing, on the other hand, postpones this burden o payment until later periods. The issue of public debt shifts the cost of public expenditures to “future generations” of taxpayers.

DBx: True dat.

Of course, government borrowing shifts the burden of debt to future generations only if this borrowing is genuine – that is, from private citizens (or from other governments) who agree to sacrifice current spending power in exchange for the promise of repayment in the future. Government borrowing – or “borrowing” – shifts no burden forward if the “borrowing” is from the government’s own central bank. Through this latter fiscal operation, the government enables itself to spend new money.

But under either fiscal operation – genuine borrowing, and “borrowing” from its own central bank – the government arranges to supply real goods and services to those who benefit from the government’s expenditures. In theory, “those who benefit from the government’s expenditures” nearly always include the great majority of the people of the country. In practice, “those who benefit from the government’s expenditures” very often include only small minorities that possess disproportionate political power. Yet when funded with either genuine debt or with newly created money, the individuals who pay for these benefits are unaware that they are being taxed.

In the case of future taxpayers, many aren’t yet alive. They clearly, as the popular phrase goes, “have no voice” during the current period. In the case of current citizens under new-money creation, none has any practical way of knowing just how many and which real resources are being taken from them by the government’s expenditure of the new money.

Government borrowing as well as “borrowing,” therefore, enables the government to visibly deliver benefits to grateful recipients without either the government or the recipients being aware of who pays for these benefits – without being aware, without seeing, who is or who will be compelled to sacrifice real resources to fund these benefits.

For my entire lifetime, which now is longer than six decades, the United States government has been fiscally profligate. It’s been so during bust times and boom times. This agency gives no evidence of being fiscally responsible. It taxes its own citizens surreptitiously in order to promote the political careers of those in office. It regularly delivers benefits to clamoring interest groups, with the costs of these benefits hidden or shoved off onto unconsenting others.

So I ask: what reason is there to expect this agency to act responsibly if it is given even more power than it already has to obstruct ordinary people’s commerce? “We need our government to protect us,” seems to be the cry, in one form or another, on so many Americans’ lips these days. To which I respond with the question: Why would anyone expect this agency to act more responsibly in times of panic – when people are thinking less clearly and when their time horizons are temporarily shortened – than this agency acts during normal times?

During normal times the U.S. government devotes a great deal of effort to enable some people to live as if reality is optional. It’s unbelievable to me that during times of panic much in the way of prudence and responsibility will guide the actions of this irresponsible, profligate, and venal organization.

Mea Culpa

(Don Boudreaux)

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Here’s a letter to those of my friends to whom I first send my letters-to-the-editor:

Friends:

Pardon me for doing what I try, usually with success, to avoid doing – namely, send a letter in correction. (Not that my letters are free of error; hardly! Instead, I’m aware that you’re intelligent enough to detect my errors on your own.) But I wish today to go on record to correct an error in my letter of yesterday.

In that letter I challenged reporter Paul Brandus’s claim that, according to a 2019 Fed survey, an alarmingly large number of Americans don’t have enough personal wealth to meet a $400 emergency expense. I stand by my foundational conclusion in that letter: the Fed survey in fact does not justify Mr. Brandus’s widely shared pessimistic interpretation of Americans’ personal financial fortunes. But nor does the survey necessarily establish the more-optimistic conclusion that I drew from it. (My more-optimistic conclusion was that 86 percent of Americans answered that they’d have no trouble making such a payment.)

In fact, the most that I think one can legitimately conclude from the survey is that at least 50 percent of Americans have enough wealth to easily pay a $400 emergency expense, and possibly as many as 86 percent have such wealth. (All of these data are, of course, pre-coronavirus.) The reason for the confusion is that the survey allowed respondents to offer multiple – up to nine – answers to the following question (available here):

Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense? If you would use more than one method to cover this expense, please select all that apply.

The ability to offer two or more answers to this question drains a great deal of meaning from this survey’s results.

The answer chosen most (by 50 percent of respondents) is “With the money currently in my checking/savings account or with cash.” The answer chosen second-most (by 36 percent of respondents) is “Put it on my credit card and pay it off in full at the next statement.” But because respondents who chose the first answer could also have chosen the second answer, it’s not necessarily true that 86 percent of respondents answered that they could easily meet a $400 emergency expense. Maybe it’s as high as 86 percent; but we can’t be sure; it can be as low as 50 percent.

Again, though, I emphasize that while my more-optimistic conclusion isn’t necessarily valid, nor is the pessimistic conclusion drawn by a large number of journalists, such as Paul Brandus. This survey does not show that 40 percent of Americans cannot easily pay, out of their current income or savings, a $400 emergency expense.

The bottom line is that this survey, as far as I can tell, is not very helpful. It shows neither what it is widely interpreted to show (namely, that 40 percent of Americans can’t easily pay a $400 emergency expense) nor necessarily what I yesterday suggested that it shows (namely, that only 14 percent of Americans would have difficulty making such a payment).

Sincerely,

Don

Quotation of the Day…

(Don Boudreaux)

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… is from page 249 of George Will’s excellent 2019 book, The Conservative Sensibility:

Markets produce many things secondarily, from shoes to trucks to

novels, but primarily they produce information, in torrents that no

government is intelligent enough to comprehend or nimble enough to

respond to.

DBx: Indeed so.

And it’s worth pointing out again that economists have a coherent theory for explaining how markets elicit knowledge and distribute it to those who can use it most productively. In stark contrast, no one who proposes to replace or to override markets with taxes, tariffs, quotas, price controls, subsidies, or other state commands has any real theory whatsoever of how government officials will acquire and then use the knowledge necessary to bring about results superior to those that would otherwise be brought about by markets. The implicit ‘theory’ used by such people who advocate the replacement or overriding of markets is simply faith in government officials: faith that these officials will somehow know or learn enough to outperform markets.

When, for example, Oren Cass and Marco Rubio call for industrial policy to better ensure that we Americans specialize in producing outputs X and Y rather than A and B, they in fact have no way of knowing that their assertions  that we would thereby be made better off are correct. Of course, these advocates of industrial policy will list benefits that they believe we would all enjoy if we adopt their schemes. But even if they are correct in these assertions of benefits, advocates of industrial policy have no way of knowing the costs of their schemes.

The deep point here is not that it’s impossible that (say) industrial-policy advocates are correct. It’s not impossible. Rather, the deep point is that advocates of industrial policy specifically, and of replacing or overriding markets generally, have no theory of how government officials will obtain the knowledge necessary for their schemes to succeed. All they have is faith and assertions based on their faith.

Bruce Caldwell on “If only there were a solution to this problem….”

(Don Boudreaux)

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Here’s an e-mail sent to me earlier today by Duke University economist Bruce Caldwell. I share it here with Bruce’s kind permission.

Don,

Yesterday there was a podcast from the WSJ talking about why the toilet paper shortage persists. A lot is made in Albany GA a town hard hit by the virus, and they also described a big machine that makes consumer toilet paper, having to bring people in to run it, all very interesting. But at the end there was a discussion with an expert who lamented how near impossible it is to stop panic buying – you worry about a shortage, you try to buy more, others do too – and the person actually said something like, there’s really no way to stop such a thing once it gets going. I nearly screamed at my phone, “What about letting the price rise?” Typical, but very disappointing that this was a WSJ podcast.

B.

That ‘$400 Emergency Expense’ Myth Remerges

(Don Boudreaux)

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Here’s a letter to WTOP Radio in Washington, DC:

Sir or Madam:

This morning your news anchor interviewed financial reporter Paul Brandus who said that even prior to the COVID-19 crisis most Americans didn’t have enough personal wealth to pay a mere $400 in emergency expenses. As the source of this ominous news Mr. Brandus cited a survey done last year by the Federal Reserve.

But the survey that Mr. Brandus cited does not reveal that most Americans have inadequate personal wealth, or even inadequate cash on hand, to pay such an expense. It reveals, in fact, quite the opposite.

When that survey first appeared, economist Alan Reynolds, looking closely at the survey question that asked about how Americans would meet a $400 emergency expense, pointed out that “[t]he question was about how people would choose to pay a $400 ‘emergency expense’ – not whether or not they could pay it out of savings (or checking) if they wanted to…. It turns out that 86% would pay cash or charge it and then pay off the bill at the next statement (many consumers autopay credit card bills from checking accounts).”

Like many Americans, I myself have more than enough cash on hand to pay a $400 emergency expense, but I, too, would nevertheless pay this expense with a credit card and then pay off the card in full at the end of the month. Paying in this way is a source of an interest-free loan for up to 31 days and, in many cases, also of rewards points. That most Americans choose to pay in this way, in short, is not evidence that prior to COVID-19 most Americans were, to use Mr. Brandus’s term, “living paycheck to paycheck.

It’s disappointing that a financial reporter continues to spread a fallacy that will only further muddy the waters for us Americans as we seek to keep to a minimum the economic damage now being inflicted upon us.

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…

(Don Boudreaux)

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… is from a letter that Albert Einstein wrote in 1901 to Jost Winteler:

Unthinking respect for authority is the greatest enemy of truth.

DBx: Yes – and, for very much the same reason, unthinking respect for authority also is the greatest friend of tyranny.

…..

Sixty-five years ago today in New Jersey Einstein died.

Some Links

(Don Boudreaux)

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My intrepid Mercatus Center colleague Veronique de Rugy hopes that frivolous litigation won’t obstruct people’s ability to deal with COVID-19.

“The full supply chain for anything at all is the entire global economy” – so writes the wise Tim Worstall.

Earlier today I appeared live on Dan Proft’s radio program for the Chicago area. The discussion was about so-called “supply chains.”

Writing in the Wall Street Journal, Peter Goettler and Robert Levy explain why the Cato Institute refused CARES Act money. A slice:

As we’ve vastly expanded the mission of government, its cost has spiraled upward beyond the country’s willingness—and, very likely, its capacity—to pay. Confronting a true crisis like Covid-19 is vastly more difficult when you carry trillions of dollars in liabilities into the fight.

Also in the Wall Street Journal is columnist Dan Henninger’s call to bring back laissez faire. Here’s his conclusion:

Washington and the states have ordered a bare-bones economy. It’s time for them to give back with bare-bones government.

Dan Mitchell makes the case against price controls. And don’t miss this item from Ryan Bourne.

Caroline Baum is rightly critical of Trump’s continuing failure to understand that he’s not CEO of America, Inc.

John Tamny rightly exposes the economic ignorance of those who believe that the American economy would be strengthened if it were ‘decoupled’ from the Chinese economy. A slice:

Others think “the Chinese” created the virus to weaken us economically. Yes, one might suppose some Chinese leaders are as braindead as certain American leaders and pundits whereby they believe trade is war, and that prosperity in other countries harms their country, but then this would counter the view held by some on the right (probably the same people) that the Chinese have long been “cheating” us by “manipulating” trade agreements in order to inundate us with exports. Ok, so which is it? The two absurd lines of thinking are rather contradictory. Indeed, if the Chinese have all along been trying to hurt us by giving us daily raises through their export of increasingly cheap goods, why would they try to export a virus that would collapse an economy on which conservatives have long told us the Chinese are reliant on for exports? For the Chinese to try to engineer economic contraction stateside would be the equivalent of Gucci seeking the annihilation of Beverly Hills.

Here’s Arnold Kling on stock buybacks.

Tariffs Worsened the Problem; More Tariffs Won’t Alleviate It

(Don Boudreaux)

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In this excellent video of less than six minutes Taleed Brown busts some of the many myths about the alleged benefits of protectionism.

And remember this reality: those who call for nationalization of the production of “critical” supplies or for reducing Americans’ “dependency” on non-American sources of supplies of “critical” or “essential” goods have no theory of how their schemes will work. It’s not that they have a bad or weak theory; they have no theory. Or, more precisely, these advocates of overriding markets have only this as their theory: “we have faith that government officials will do as we hope they will do.” These opponents of markets simply declare their devotion to some aspirational outcomes and then trust that government officials charged with the task of achieving these aspirational outcomes will do so, or will at least outperform markets.

You Don’t Gotta Have Faith

(Don Boudreaux)

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Here’s a letter to someone who recently “stumbled in to Cafe Hayek”; he doesn’t like its menu items and told me so rather rudely:

Mr. Juska:

Deeply disturbed by my “close minded opposition to laws for guaranteeing affordable prices,” you write that “faith in free markets in normal times is never justified but faith in them in dangerous times like the one now shows extreme stupidity.”

I’m sorry, but I cannot help but be amused by the irony of your accusation. You accuse me (and most other proponents of markets) of being motivated by that which does not motivate us but which does motivate those who would suppress markets with command-and-control diktats – namely, faith.

Put aside here the little matter of the historical record overwhelmingly supporting the case for free markets. Focus instead on this objective reality: those of us who endorse markets rest our case on a well-developed theory that explains how markets tend to allocate resources to their most-productive uses, while those who endorse the replacement of markets with political and bureaucratic commands have absolutely nothing comparable.

The economic case for markets is built on economists’ theory of price and of the competitive market process. This theory explains how, when property rights are secure, prices are set and change and how they, along with resulting profits and losses, inform and incite producers to use resources to meet as many as possible consumer demands. This theory explains also how prices inform and incite each consumer to coordinate his or her choices with the choices of hundreds of millions of other consumers.

Does this theory explain every single observed facet of economic reality? Of course not, for no truly explanatory theory could possibly be so comprehensive. Does following this theory guarantee ‘perfection’ (however defined) in real-world markets? Of course not, for the world is too unruly ever to produce any such outcome. But this theory does explain how resources are allocated by markets, and it explains this allocation remarkably well.

In contrast, those who propose to replace markets with government direction have no theory – none – of how resources would be allocated in ways that satisfy as many as possible consumer demands. Such people have only faith – faith that government officials somehow ‘know’ what the ‘correct’ prices are – faith that bureaucrats somehow ‘know’ which goods and services fellow citizens ‘should’ produce more of and which they should produce less of – faith that politicians somehow ‘know’ which things ‘should’ be imported and exported and which things ‘should not’ be imported and exported. And on top of this utterly baseless faith in state-officials’ knowledge and information is the equally unjustified faith that these flesh-and-blood officials, possessing authority to coerce, will behave as angels.

So please, if you wish – as you should – to warn against those who would turn the economy over to faith-based true believers operating without anything remotely resembling a theory of how their interventions would work, don’t warn against those of us who have an actual theory to explain how markets allocate resources; warn instead against those who, wishing to suppress markets, offer no explanation whatsoever of how their designs will work beyond the cry of “Trust us!”

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