Russell Roberts's Blog, page 452
February 3, 2020
Quotation of the Day…
… is from page 252 of my late Nobel-laureate colleague Jim Buchanan’s 1966 paper “An Individualistic Theory of Political Process,” as this paper is reprinted in Moral Science and Moral Order (2001), Vol. 17 of The Collected Works of James M. Buchanan:
In their behavior in the economic process, private people, as consumers, workers, investors, and entrepreneurs, are assumed to have differing tastes, desires, and values. And the economy represents the institutional or organizational response to the need to satisfy simultaneously this manifold set of wants.
DBx: Yes – and this assumption about people’s behavior is realistic. ‘The economy,’ as we call it, is the unplanned – and unplannable – on-going social process that results when each individual pursues his or her own goals constrained not only by nature (I can’t spend these next few minutes writing a blog post and spend these same next few minutes exercising at the gym) but also by the inability to coerce or defraud other individuals (I can’t compel you to read my blog; if I wish you to do so I must use only peaceful and honest means of persuading you that it is in your interest to choose to do so).
Because everyone in a market economy must play by these rules, no one in a market economy gets everything that he or she desires and that is, at each moment, physically possible for that person to get. At this moment, I can get a cup of coffee from Peet’s, but to do so I must give up $2.50 worth of spending power – spending power that, if I do buy the coffee, I will no longer have to put toward buying a new pair of shoes or into my savings to better prepare me for a rainy day.
Yet because at this moment the coffee that I desire is already brewed and splendidly fresh and piping hot, it’s physically possible for me to get the coffee and retain the $2.50 of spending power. I see this reality. I’m aware that, while I might be better off having the coffee despite turning over to Peet’s $2.50 to get it, I would be even better off having the coffee and keeping all or at least some of the $2.50.
If my understanding of economic reality is poor, I might well sincerely believe that justice requires Peet’s to give me a cup of coffee free of charge, or at some price less than $2.50. After all, Peet’s is physically capable of doing so. Focused greedily only on myself, I don’t see the person who would otherwise get and enjoy the cup of coffee that I fancy getting for myself free of charge or at a lower price. My greedy focus on myself blinds me also to the likely response of Peet’s to my stealing a cup of coffee or refusing, once I have the coffee in hand, to pay for it the full price of $2.50.
“Peet’s is a rich corporation,” I might ‘reason,’ “and so it can afford to part with its products at prices lower than it posts on its menu.” I – in my economic ignorance – might even get all philosophical about the matter and conclude that corporations, by charging consumers the prices that they charge and by paying workers the wages they pay, are ripping off consumers and workers. I might then rush to the polling place to vote for Bernie Sanders, Elizabeth Warren, or Alexandria Ocasio-Cortez.
Because at every moment in a market economy some individual or sub-group of individuals can be made materially better off if the rules of the market economy are broken, the market economy appears to the economically illiterate to unjustly deny to some worthy people gains that those worthy people ‘should’ have – and, at this moment, can have. Of course, being economically literate involves stepping back to look at the larger and longer and fuller picture. And when one does this stepping back, one sees all sorts of ill consequences that are missed by the economically illiterate. These ill consequences include, but are not limited to, reduced incentives to produce.
February 2, 2020
Supporters of Trump’s Tariffs Repeatedly Reveal their Economic Ignorance
Here’s a letter to the Washington Examiner:
Editor:
Jason Orestes’s brief in support of Trump’s tariffs reads like a term paper from a sophomore who, having ignored the assignment until the last minute, cuts and pastes into the final document various assertions hastily found on the Internet (“Trump reinvented tariffs and it worked,” January 29). To get a flavor of Orestes’s ignorance of his assigned topic, consider this paragraph:
“Trump’s simplistic-yet-correct sentiment that leverage in a trade war essentially resides with the party who incurs the trade deficit should no longer be condescendingly dismissed by economy wonks who denigrate any policy that isn’t globalist goodthink. China relies far more on exporting to the United States than we do purchasing those same cheaply made imports: a straightforward notion that tariffs exposed.”
Forget the juvenile name-calling. Also, overlook Orestes’s implied criticism of the decision-making capacity of Americans who choose to buy from China what he calls “cheaply made imports.” (Trumpian populists apparently are as contemptuous as are elites of the economic choices made by ordinary Americans.) Instead, focus on Orestes’s misunderstanding of trade deficits.
Even if we follow Orestes and discount – which we should not – the value to us Americans of the goods we import, Orestes’s assertion that “leverage in a trade war essentially resides with the party who incurs the trade deficit” remains comically mistaken. The reason is that a U.S. trade deficit means that foreigners are investing more in America than Americans are investing abroad. Orestes would be correct only if investments by foreigners in America are of little or no value to Americans. Only if American jobs in foreign-built factories here are of no consequence – only if that part of the value of Americans’ 401(k)s created by foreign demand for shares of U.S. corporations is irrelevant – only if the R&D in America that is financed by foreign savings has no positive impact on U.S. economic growth would Orestes even begin to be correct to assert that U.S. trade deficits mean that we Americans have less to lose from a trade war than do our trading partners. But of course foreign investment in America is of enormous benefit and value to us Americans. It’s a shame that Orestes is unaware of this basic reality.
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
…..
My intrepid Mercatus Center colleague Veronique de Rugy observed in conversation that this Orestes piece reads like something from The Onion. She’s correct. It’s too bad that the editor of the Washington Examiner is less observant.
Quotation of the Day…
… is from pages 19-20 of Mario Rizzo’s and Glen Whitman’s much-anticipated 2020 Cambridge University Press book, Escaping Paternalism: Rationality, Behavioral Economics, and Public Policy (reference excluded):
To make matters worse, there is little reason to believe that legislators and bureaucrats will engage in the kind of careful, modest, data-driven policymaking that behavioral paternalists envision. Lacking sufficient knowledge of people’s “true” preferences, but nevertheless charged with creating policy, policymakers will inevitably find some other basis on which to do so. Even when they are not manipulated by pressure groups, policymakers are likely to rely on simple rules of thumb and unjustified assumptions. They presumably share the behavioral and cognitive biases that paternalists have attributed to private decision-makers, but they lack the effective incentives that the latter have to correct their own failings. Consequently, we argue that policymakers will tend to promote some combination of their own preferences, socially approved preferences, or special-interest preferences – none of which are synonymous with the real preferences of people targeted by paternalist laws.
February 1, 2020
Bonus Quotation of the Day…
… is from page 16 of 2009 Economics Nobel-laureate Elinor Ostrom’s 1997 Presidential Address to the American Political Science Association; the address is titled “A Behavioral Approach to the Rational Choice Theory of Collective Action,” and is published in the March 1998 issue of the American Political Science Review (emphasis added):
Without individuals viewing rules as appropriate mechanisms to enhance reciprocal relationships, no police force and court system on earth can monitor and enforce all the needed rules on its own. Nor would most of us want to live in a society in which police were really the thin blue line enforcing all rules.
DBx: If most of society’s rules are obeyed most of the time by most people – and mostly because most people believe that doing so is simply the right thing to do – that society will be mostly harmonious and peaceful. And only such a society has any prospects for also being prosperous.
Human nature being what it is, such extensive rule-following will occur only if the rules are ones that grow organically from the life of that society rather than ones that are imposed in the form of legislation or administrative diktat. This fact isn’t much changed if the legislation and diktats are imposed by governments chosen democratically.
Some Links
Wages are the most salient form of compensation, but they are far from the only component of income—that is, of the total flow of resources available to households for spending and saving. The nonpartisan Congressional Budget Office (CBO) computes a comprehensive measure of inflation-adjusted market income that includes labor market earnings, the value of employer-provided health insurance, and business and capital income. The median household saw market income gains of 21% between 1990 and 2016, the last year for which data are available. The CBO also computes inflation-adjusted income after taxes and government transfers, which grew by 44% for the median household during this period. Households in the bottom 20% saw their post-tax-and-transfer income grow by 66% over these years.
(Note: I believe that Strain is mistaken when he writes that ordinary Americans’ wages did stagnate from the mid-1970s until 1990. For evidence to the contrary of Strain’s claim about this 15-year span, see W. Michael Cox’s & Richard Alm’s 1999 book, Myths of Rich & Poor.)
John Cochrane is rightly grumpy about wokeademia.
James Capretta is understandably dismayed by Trump’s fiscal incontinence.
Quotation of the Day…
… is from pages 210-212 of my colleague Richard Wagner’s insightful paper “Liability Rules, Fiscal Institutions and the Debt,” which is chapter 11 in the 1987 collection Deficits (James M. Buchanan, Charles K. Rowley, & Robert D. Tollison, eds.):
The ability of government to borrow at a lower rate of interest than other borrowers is not at all a sign that it is a less risky enterprise than other enterprises. Rather it is a sign of government’s ability to cover up through taxation what is really its greater costs and riskiness. The force of government’s coercive potential is represented by the spread between its borrowing rate and that of diversified corporations. If a government can borrow at, say, 10 per cent while a diversified corporation must pay, say, 12 per cent, the 2 per cent differential is at least equal to the anticipated taxpayer loss that would otherwise be borne by bondholders. I say ‘at least’, because that loss would be even larger if government were a less efficient enterprise than private firms – a proposition that finds considerable support in the literature on bureaucracy….
The argument that public debt allows people to borrow at government’s borrowing rate, while correct, entails a grossly misplaced emphasis as it is commonly developed. The ability of government to borrow at a lower rate than diversified private institutions would not seem to reflect any social gain due to a lowering or risk, but rather would seem to represent the strength of government’s promise to use the police powers of government to cover what would otherwise be losses to borrowers by imposing higher taxes on taxpayers.
DBx: Yes. By paying attention to what happens on the real side of a fiscal ledger (as opposed to confining one’s attention exclusively to the monetary side) one sees the true consequences – the real benefits and real costs – of each method of financing government expenditures. And a comparison of these real benefits to these real costs is what must be done to determine the merits of any method of financing.
Because government’s use of debt financing does not miraculously create real resources out of thin air – or, rather, out of the presses that print government bonds – government’s use of debt financing would be superior to its use of taxation only if (1) the real resource costs of using debt financing to fund $X amount of spending were lower than are the real resource costs of funding $X amount of spending through taxation, and (2) the use of debt financing does not cause the amount spent to be higher than necessary. In some cases debt financing might, on these criteria, be advisable.
But in general debt financing of government spending is highly unlikely to be anything other than more costly than financing through taxation. The reason is that debt financing allows today’s citizens-taxpayers to free-ride on the wealth of tomorrow’s citizens-taxpayers. The people who must pay interest and principal on government debt incurred today are citizens-taxpayers tomorrow. And when Jones gets to spend Smith’s money, Jones spends both unwisely and excessively. Deficit financing causes the amount spent to be, not $X, but more than $X.
Note that every government can tax directly – say, by raising income-tax rates in ways that result in people paying more money over to the government. But most national governments can also tax surreptitiously, chiefly through inflation.
(Note to experts in public finance: I don’t buy the claim that Ricardian equivalence describes reality – and nor did Ricardo! But even if it were true that today’s citizens-taxpayers increase their savings by an amount equivalent to the full discounted value of tomorrow’s higher tax burden, debt financing would be no miraculous means of lowering, and much less of eliminating, the real costs of the programs paid for today with borrowed funds.)
January 31, 2020
2002 Review of the 2nd Edition of Posner’s ‘Antitrust Law’
In my effort to archive at Cafe Hayek as many as possible of my past writings, I post here my March 2002 review of the Second Edition (2001) of Richard Posner’s Antitrust Law. My review originally appeared in the A.B.A. journal The Antitrust Source. You can read the full review beneath the fold.
Some Links
Samuel Gregg responds to those who criticize his wise warnings against industrial policy. A slice:
The very fact, however, that a country’s comparative advantages are constantly changing is, if anything, yet another reason to be wary about experts who think they can second-guess the workings of markets via some combination of industrial policy and tariffs. Such reservations are neither an instance of “market fundamentalism” nor a reflection of excessive abstraction. Rather they flow from the deep realism about the human condition that is central to critiques of economic nationalism. For one thing, it is simply beyond the ability of any one ostensibly apolitical technocrat, team of experts, or government department to absorb all the information that they would need to design the optimal industrial policy for a sector of the economy—let alone an entire national economy such as Japan attempted between 1949 and 2001.
Vincent Geloso writes on the economics of pandemics and quarantines.
Chris Edwards offers eight lessons on infrastructure policy.
Steven Greenhut rightly bemoans Trump’s fiscal incontinence.
George Will identifies utility in a futile presidential impeachment trial.
Note on the Fly
With this note I do not mean to be mean or intend to be rude. I intend only to announce that I will no longer respond to anyone who sends to me his or her endorsement of a heretofore overlooked alleged source of free goods and services.
Nothing done on the monetary or financial side of an economy makes the use of real goods and services free. Zero interest rates do and cannot make the use of real goods and services free (or less costly). Money creation does not and cannot make the use of real goods and services free (or less costly). Debt financing does not and cannot make the use of real goods and services free (or less costly).
Indeed, the belief in the possibility of miraculously eliminating or reducing costs merely by manipulating the monetary or financial side of the ledger typically causes costs to unnecessarily increase. The belief that this or that financing scheme makes resource use free causes people to divert too many resources to whatever projects are funded through such schemes. Such careless uses of resources are wasteful, no matter how well these wastes are hidden by manipulations on the financial side of the ledger.
Sound monetary and fiscal policies are, of course, to be applauded. Loudly. Such policies enable economic actors to get the most value out of any given amount of real goods and services. Ditto for sound financial practices and well-functioning financial markets. But there is no possible way to use the monetary side of the ledger, or any financial hocus-pocus, to make costs on the real side of the ledger disappear.
And so just as a physicist would wisely refuse to waste her time reading the latest scheme for creating a perpetual-motion machine, I refuse to waste my time reading about the latest ‘get-stuff-free’ gimmick. The gimmick is just that; it ain’t credible.
Again, for emphasis: when the real side of the ledger is examined – when the use of human labor, magnesium, steel, construction cranes, paper clips, computer chips, potato chips, and other scarce goods and services is examined – the examiner who isn’t completely blind will see that devoting some goods and services to use X means that those same goods and services, which could have been used in W, Y, or Z, are in fact not used in those alternative ways. The production or subjective consumption values that are thereby not produced – not produced because real goods and services are used in X – are costs, wholly unavoidable this side of Shangri-la.
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