Russell Roberts's Blog, page 456
January 21, 2020
Getting the Language Right
Here’s a letter to the Wall Street Journal:
A recent headline of yours reads “Trump Doubles Down on Threats to Impose Tariffs on European Cars” (Jan. 21).
May I suggest that you change your policy to always refer to tariffs as being imposed on people rather than on goods and services? Automobiles, sugar, and other imports – being inanimate – pay nothing. Tariffs are paid only by people, and especially by citizens of the government that imposes them. The whole point of protective tariffs, after all, is to artificially raise the prices of imports in order to entice domestic citizens to pay prices higher than these flesh-and-blood people would otherwise pay for imports’ domestically produced alternatives.
A more accurate and revealing headline in this case would be “Trump Doubles Down on Threats to Impose Tariffs on American buyers of European Cars.” This candid description better draws readers’ attention to the tariff’s actual victims.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Bonus Quotation of the Day…
… is from page 309 of Thomas Sowell’s magnificent 1980 book, Knowledge and Decisions:
An ideology may be viewed as a knowledge-economizing device, for it explains complex empirical data with a few simple and familiar variables. It is hardly surprising that ideological explanations should have a special appeal to those with higher costs of alternative knowledge – the inexperienced (“youth”) and the previously politically apathetic (“masses”).
A Deficit of Clarity
Here’s a letter to an attorney friend of mine in St. Louis:
Bevis:
Thanks for reading my letter in today’s Wall Street Journal – one in which I note that foreign investments in the United States promote American trade deficits. But naturally I regret that you, as you say, “don’t know what [I’m] talking about” on this front. I apologize for being unclear.
A U.S. trade deficit arises whenever, during some period – say, a month – we in America buy more goods and services as imports (measured in dollar value) than we sell as exports. So, if $Imports > $Exports, we run a trade deficit. If instead $Imports = $Exports, there’s neither a trade deficit nor a trade surplus. If $Imports < $Exports, we run a trade surplus.
For example, if in January Americans spend $100 on imports and foreigners in January immediately spend every cent of that $100 buying American exports, then we run in January neither a trade deficit nor surplus.
But suppose instead that foreigners are intrigued by an investment opportunity in St. Louis. To take advantage of this opportunity – that is, to invest in it – they need dollars. And so rather than spend the entire $100 on American exports, foreigners spend only some of the dollars on American exports. Foreigners use the remainder of the dollars to invest in America.
Foreigners might, for instance, want to invest $40 in America. If so, they can spend only $60 on American exports. America thus, during this period, runs a trade deficit of $40.
It’s really that simple.
Yes, the details of reality – especially the ability of past investments to be liquidated or to change form, the fact that the amount of capital in the world isn’t fixed, and the fact that investments abroad are also made by us Americans – add some steps to any complete explanation of real-world changes in a country’s trade deficit (or surplus). But these details do nothing to alter the fundamentals as revealed in the simple example above.
The bottom line is that foreigners are no different than us Americans: they can spend their dollars on consumption goods and services or they can invest these dollars. And so the more foreigners invest in America, the less they will be able to spend on American exports.
Put differently, the more foreigners invest in America, the higher will be – all other things held constant – America’s trade deficit. This fact is one reason why Trump trade guru Peter Navarro is comically inconsistent in applauding increased foreign investment in the U.S. given his and his boss’s (in)famous hostility to U.S. 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
Some Links
What’s more, the late William Niskanen, economist and former Chairman of the Cato Institute looked at this issue in his 1997 paper “R&D and Economic Growth: Cautionary Thoughts.” He argued that the idea that R&D drives economic growth isn’t as sound as it seems on the surface. What we know, Niskanen writes, is that there is “a strong relationship between real expenditures for research and development (R&D) and the level of national output—but little relationship with the rate of economic growth. This record is more consistent with a hypothesis that R&D is an income-elastic consumption good, something that rich people and rich nations do, rather than an investment that will increase future economic growth.”
Kevin Williamson is right that Apple is right to refuse to help the FBI hack into iPhones.
Alberto Mingardi reviews Neil Monnery’s A Tale of Two Economies.
Protectionists may defend their policies on political grounds, but that means ignoring the mounting evidence of economic harm.
Quotation of the Day…
… is from page 296 of Deirdre McCloskey’s marvelous 2019 book, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All:
Notice that if government statisticians did not collect the numbers on the balance of payments, you would not feel them. It’s not true of high inflation or mass unemployment or rising real income. In fact, many economists regard the collecting of the national balance of payments as a silly nuisance, serving merely to encourage bad economics, such as protectionism – better called favoritism combined with defective accounting. The great economist Arnold Harberger (1924- ) is fond of pointing out that the salaries of all the academic economists worldwide would be covered many times over by the economic gain from their repeated showing that protectionism is bad. We are told that embargoes on Iran and North Korea will hurt such evil people. [U.S.] Tariffs are self-imposed embargoes, hurting … uh … Americans. Whoops.
DBx: And yet many people on the political left and – today mostly – on the political right never tire of warning of the dangers of so-called “trade deficits.” Trump believes that U.S. trade deficits are both a sign that we Americans are “losing” at trade and a further burden on the American economy.
Nearly all such people who warn of the alleged dangers of trade deficits reveal by the substance of their arguments that they don’t actually know what trade deficits are. (And I do not here mean the usually harmless confusion of the “deficit” in goods-and-services trade with the more general current-account deficit.) Nearly all such people make no connection between this “deficit” and its corresponding net inflow from abroad of capital into the domestic economy.
Language matters. I wonder how many American conservatives (and others) would rise up against U.S. trade “deficits” if this accounting artifact were instead called by the equally accurate name of “U.S. stuff surplus”: during the current accounting period a U.S. trade “deficit” means that we Americans receive for the stuff – the real goods and services, measured in monetary value – that we send to foreigners a greater amount of the stuff – the real goods and services, measured in monetary value – that foreigners send to us in exchange. A U.S. trade “deficit” is a U.S. “stuff surplus.” (It’s also – as noted above and in the past pointed out here countless times – a U.S. capital-account surplus.)
Only if you believe yourself to be made poorer when, in exchange for a given amount of goods and services that you pay, you receive from your grocer or your dentist or your plumber or your yoga instructor more than you received in the past or more than you expected to receive should you, as as a practical matter, worry about any so-called “trade deficit” that your country is “running.” Ditto if you believe yourself to be enriched if the amount of goods and services that you must give up to get any given amount of goods and services in exchange from others rises.
“Deficit” suggests “bad” and “losing.” “Surplus” suggests “good” and “winning” and “gaining.” The world today would be a better, richer, and freer orb if the mercantilist notion of balance of payments had died in 1683 with Jean-Baptiste Colbert. (Even better would have been that this notion had never been conceived.) Alas, this absurd and misleading artifact still lives. Given this lamentable reality, let us at least work to change its name from “trade deficit” to “stuff surplus.”
January 20, 2020
Oren Cass Is Incorrect to Equate the Competitive Market Process With an Inebriated Ass
Now to Cass’s foundational error, which is this: he completely misses the market’s role at gathering and processing information. This error is revealed when he equates the competitive market to the meanderings of a drunk donkey. In fact, it is no such thing.
As many economists – from Adam Smith in the 18th century through Carl Menger in the 19th and Ludwig von Mises, F.A. Hayek, Armen Alchian, Milton Friedman, Julian Simon, Deirdre McCloskey, and Vernon Smith in the 20th and 21st – have revealed, the competitive market price system at every moment marshals and acts in accordance with an amount of dispersed information so detailed, vast, and frequently changing that no government officials could possibly hope to outperform the results of this market process. These economists’ argument is not that the market process works perfectly; of course it doesn’t. The argument instead is that no amount of conscious planning or intervention can hope to match, and much less to surpass, the performance of decentralized and competitive markets over time.
Cass might disagree with these economists and their arguments. But for this disagreement to obtain any measure of legitimacy requires that he advance a substantive argument to the contrary. Instead, though, he writes in apparent unawareness of this vast scholarly literature. He simply offers two twin assertions: on one hand, market processes are akin to an intoxicated ass, and on the other hand, government officials somehow (by what mysterious means we aren’t told) have uniquely excellent access both to information about the current state of the economy as well as to knowledge about the future. (Cass also ignores public-choice considerations – that is, the bias of government officials to serve special interests at the expense of the general interest – but that’s a tale for another time.)
Assertions such as those made by Cass are easy to offer. Dreamers, dirigistes, and demagogues have done so since the dawn of the industrial age. These assertions are not, though, a sufficient reason to ignore economic theory and to empower state officials to superintend and to override the results of competitive markets in which individuals, as both consumers and producers, spend their own money – and the results of which have proven, without exception, to be far superior to consciously imposed schemes of politicians and bureaucrats.
Government Schooling and Supermarkets
Someone recently wrote to me asking for a reference to something that I’d written comparing the way that we Americans purchase groceries to the way that most of us purchase K-12 schooling. On May 5th, 2011, I published an essay on this topic in the Wall Street Journal, but a search of Cafe Hayek reveals that I have yet to reproduce here that essay in its entirety.
Here it is:
If Supermarkets Were Like Public Schools
Teachers unions and their political allies argue that market forces can’t supply quality education. According to them, only our existing system — politicized and monopolistic — will do the trick. Yet Americans would find that approach ludicrous if applied to other vital goods or services.
Suppose that groceries were supplied in the same way as K-12 education. Residents of each county would pay taxes on their properties. Nearly half of those tax revenues would then be spent by government officials to build and operate supermarkets. Each family would be assigned to a particular supermarket according to its home address. And each family would get its weekly allotment of groceries — “for free” — from its neighborhood public supermarket.
No family would be permitted to get groceries from a public supermarket outside of its district. Fortunately, though, thanks to a Supreme Court decision, families would be free to shop at private supermarkets that charge directly for the groceries they offer. Private-supermarket families, however, would receive no reductions in their property taxes.
Of course, the quality of public supermarkets would play a major role in families’ choices about where to live. Real-estate agents and chambers of commerce in prosperous neighborhoods would brag about the high quality of public supermarkets to which families in their cities and towns are assigned.
Being largely protected from consumer choice, almost all public supermarkets would be worse than private ones. In poor counties the quality of public supermarkets would be downright abysmal. Poor people — entitled in principle to excellent supermarkets — would in fact suffer unusually poor supermarket quality.
How could it be otherwise? Public supermarkets would have captive customers and revenues supplied not by customers but by the government. Of course they wouldn’t organize themselves efficiently to meet customers’ demands.
Responding to these failures, thoughtful souls would call for “supermarket choice” fueled by vouchers or tax credits. Those calls would be vigorously opposed by public-supermarket administrators and workers.
Opponents of supermarket choice would accuse its proponents of demonizing supermarket workers (who, after all, have no control over their customers’ poor eating habits at home). Advocates of choice would also be accused of trying to deny ordinary families the food needed for survival. Such choice, it would be alleged, would drain precious resources from public supermarkets whose poor performance testifies to their overwhelming need for more public funds.
As for the handful of radicals who call for total separation of supermarket and state — well, they would be criticized by almost everyone as antisocial devils indifferent to the starvation that would haunt the land if the provision of groceries were governed exclusively by private market forces.
In the face of calls for supermarket choice, supermarket-workers unions would use their significant resources for lobbying — in favor of public-supermarkets’ monopoly power and against any suggestion that market forces are appropriate for delivering something as essential as groceries. Some indignant public-supermarket defenders would even rail against the insensitivity of referring to grocery shoppers as “customers,” on the grounds that the relationship between the public servants who supply life-giving groceries and the citizens who need those groceries is not so crass as to be discussed in terms of commerce.
Recognizing that the erosion of their monopoly would stop the gravy train that pays their members handsome salaries without requiring them to satisfy paying customers, unions would ensure that any grass-roots effort to introduce supermarket choice meets fierce political opposition.
In reality, of course, groceries and many other staples of daily life are distributed with extraordinary effectiveness by competitive markets responding to consumer choice. The same could be true of education — the unions’ self-serving protestations notwithstanding.
Mr. Boudreaux is professor of economics at George Mason University and a senior fellow at the Mercatus Center.
Quotation of the Day…
… are the closing lines (found on page 185 of the original edition) of James M. Buchanan’s and Richard E. Wagner’s important 1977 book, Democracy in Deficit: The Political Legacy of Lord Keynes:
On the one side, there lies the falsely attractive path toward “national economic planning,” a choice that would have us allow government to go beyond traditional bounds because it has failed even to fulfill its more limited promises. On the other side, there is the way of the free society, of men and women living within a constitutional contract that also keeps governments in well-chosen harness. This way, so well understood by Americans two centuries past, has been obscured by the underbrush of burgeoning bureaucracy. Will we, like Robert Frost’s traveler, choose the road less traveled by?
DBx: In 1977, Buchanan and Wagner were warning against the pretensions mostly of professors, pundits, and politicians on the political left. In 2020 these same people remain sufficiently – perhaps even more – pretentious and, thus, we should continue to beware of them and their mix of hubris, economic and historical ignorance, and wild fantasies.
But in 2020 Buchanan’s and Wagner’s warning is increasingly applicable also to self-identified American conservatives – people such as Marco Rubio, Josh Hawley, Tucker Carlson, Daniel McCarthy, and Oren Cass. Despite some differences that separate each from the other, and that separate each from self-identified “Progressives,” conservative who support interventions such as industrial policy are, no less than their “Progressive” counterparts, ignorant of history, clueless about economics, naive about human nature, uncritical of pop and potted accounts of recent events, dismissive of much of what they profess to respect (including the U.S. Constitution), contemptuous of principles, and stupidly trusting of those in their tribe who possess state power.
Like “Progressives,” these conservatives too often mistake the unavoidable making of inescapable trade-offs as manifestations of problems ‘solvable’ by state intervention. They also – and also like their “Progressive” counterparts – mistake their ability to imagine splendid social and economic outcomes, or to describe such outcomes on paper, as sufficient evidence that such outcomes can realistically be engineered into existence by the state, and will be so engineered if only we entrust the right officials with sufficient power.
These conservatives and “Progressives” would have us lose touch with reality. Looking down one path, they see reality, and they dislike it. Looking down the other path they see only beautiful mirages conjured by their imaginations. Believing the latter to be real, they recommend the latter path. Reality-based people do not follow them willingly down this path, because behind the mirages is a reality far worse – a reality more impoverished and more filled with oppression – than the other path.
January 19, 2020
Bonus Quotation of the Day…
… is from page 31 of the original edition of Lee Francis Lybarger’s 1914 book, The Tariff (which I just received as a generous gift from David Henderson) (original emphases):
But the word [“protectionism”] as used in the Tariff has the very opposite meaning. It does not protect the people from extortion. It subjects them to extortion, by leaving them to the tender mercies of only one set of sellers. It does not protect the people from high prices. It exposes them to such conditions as make prices high. That is its purpose. The only way a Protective Tariff can possibly operate is to increase the price of the things on which it is levied.
Quotation of the Day…
… is from page 155 of Bas Van Der Vossen’s and Jason Brennan’s superb 2018 book, In Defense of Openness (original emphasis):
Growth is what actually saves lives, actually reduces misery, and actually meets people’s basic needs over time. Past economic growth is why Bas, Jason, Peter Singer, and our readers are debating how much a duty we have to rescue distant strangers, rather than ourselves jostling for the best position in a breadline. Future growth is our best bet – possibly our only bet – to lift the millions who are suffering out of poverty.
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