Quotation of the Day…

by Don Boudreaux on September 29, 2014

in Inequality

… is the title of Chapter 5 of William Easterly’s excellent 2006 book, The White Man’s Burden:

The rich have markets, the poor have bureaucrats.

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This post by Phil Birnbaum on the unfortunate ease with which statistics on income distributions are misinterpreted – often in ways that are profoundly mistaken – is one of the best things that I’ve read on income inequality in quite a while.  (HT Francis Stiff)  Birnbaum’s post is longer than the usual blog post but, please trust me, it’s well worth reading in full.  A slice:

It sure seems like the [New York] Times writer believes the numbers [in a recent Fed report on income distribution] apply to individuals. For instance, he also wrote,

“There is growing evidence that inequality may be weighing on economic growth by keeping money disproportionately in the hands of those who already have so much they are less inclined to spend it.”

The phrase “already have so much” implies the author thinks they’re the same people, doesn’t it? Change the context a bit. “Lottery winners picked up 10 percent higher jackpots in 2013 than 2010, keeping winnings disproportionately in the hands of those who already won so much.”

That would be an absurd thing to say for someone who realizes that the jackpot winners of 2013 are not necessarily the same people as the jackpot winners of 2010.

Speaking of economic inequality: I don’t know if the Grumpy Economist John Cochrane ever visits Cafe Hayek, but I take this opportunity to plead that he post at his blog – or somewhere – the talk that he gave on Friday at the Hoover Institution conference in honor of Gary Becker.  That talk was as witty as it was profound, wise, and important – all greatly so.  (Here’s one of my favorite lines from John’s talk; it was a line in a part of his talk explaining some differences between old wealth and new: [I'm going on memory here]: “Mark Zuckerberg wears a hoodie, not a top hat.”)

And on the fate of the living standards of middle-class Americans, Scott Sumner’s post on this topic is worthwhile.

Edward Conard challenges, in this brief post, Paul Krugman’s recent Bob-Frank-like lament that allegedly so much economic activity is wasteful competition for status.  Note, by the way, the tension between Krugman’s claim here and the claim that Birnbaum quotes above from the New York Times‘s reporter.  If Krugman is correct that “for many of the rich flaunting is what it’s all about,” then Thomas Piketty’s thesis is weakened.  The reason is that spending lavishly and conspicuously reduces the growth and accumulation of capital for the rich that Piketty believes to be a fundamental ‘law’ of capitalism and the heart of the problem with capitalism.

Stephan Livera takes on Damon Linker’s recent poorly informed criticism of the libertarian understanding of spontaneous order.

In response to this recent post at the Cafe, Duke economist Ed Tower sent me this related Forbes essay, by Robert Archibald and David Feldman, from 2010.

The London-based Institute of Economic Affairs produced this short video on the regressively of sin taxes in Britain.

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Quotation of the Day…

by Don Boudreaux on September 28, 2014

in Complexity & Emergence, Hubris and humility

… is from page 43 of George Smith’s 2013 Cambridge University Press volume, The System of Liberty:

Hume argued that the social utility of a juridical system is not due merely to the direct effects of each constituent rule, considered separately and in isolation, but rather to the indirect, long-range benefits of the system as a whole, which contributes stability and predictability to a social system.

Rules are vitally important.  Good rules themselves embody much wisdom, and there is much wisdom – and security – in a commitment to follow rules.  Society progresses, however, only when patterns are broken.  Yet society can also regress when patterns are broken.  The challenge is to arrange for the experimentation and risk-taking that are the seeds of progress while simultaneously protecting the social order from the dangers of large-scale harmful disruptions.  While listing and elaborating on how best to meet this challenge would take volumes, one point seems clear: decentralization of decision-making is necessary.  Not only can individual decision-makers in a decentralized society experiment with breaking ‘the rules’ – experiment with different ways of achieving their ends – without having first to get the approval of some collective or some authority, but also, when such individual experiments fail, the consequences are localized and more thoroughly concentrated (“internalized”) on the responsible decision-makers.

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Bonus Quotation of the Day…

by Don Boudreaux on September 27, 2014

in Reality Is Not Optional, Seen and Unseen, War

… is from page 172 of the must-read lead article in the current issue of The Independent Review by my colleague Chris Coyne and GMU Econ student Abigail Hall, “Perfecting Tyranny: Foreign Intervention as Experimentation in State Control“; this is an essay that deserves the close attention of everyone – and especially that of hawkish conservatives (link added):

Those who have developed a comparative advantage in innovating and implementing state-produced social control via foreign interventions will benefit in the form of higher wages by employing their unique human capital domestically.  Specialists in state-produced social control are able to suggest and implement new techniques and organizational forms of state social control on the domestic population based on their experiences of doing the same to distant populations.  The result is that domestic activities, whether in the public sector or the private sector, are influenced by the experiences and skills gained during the coercive foreign intervention.  As this process unfolds, the distinction between the state-produced social control used abroad and state-produced social control used domestically becomes blurred.

In some cases, the skills in state-produced social control are explicit, meaning the person becomes known for being an expert in a certain type of social control – for example, monitoring and surveillance, military strategy and tactics, and so on – and is rewarded for effectively implementing and administering those techniques and methods at home.  Specialists in state-produced social control may be employed within an existing government agency or may be involved in the creation of an entirely new state agency or group within a government agency.  Alternatively, they may be hired by or may found a private firm that receives government contracts associated with the production of social control.

In other cases, the skills acquired through coercive foreign interventions are implicit, meaning they shape the person’s view of government-produced social control.  Per Herbert Simon’s insight, one cannot help but be shaped by the organizational context within which one is embedded.  In this scenario, activities that previously would have been thought of as unacceptable, extreme, or outright repugnant become normalized and natural.  The way things were done abroad becomes standard operating procedure for how government activities are carried out.  Domestic citizens begin to be treated as foreign populations were treated.  Whether the skills accumulated through coercive foreign interventions are explicit or implicit, the result is that advances in state-produced social control developed abroad are imported back to the intervening country.

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Quotation of the Day…

by Don Boudreaux on September 27, 2014

in Growth, Inequality, Standard of Living

… is from page 303 of 2006 Nobel laureate Edmund Phelps’s 2013 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change:​

There are plenty of economies in human history that offer more stability and equality than any modern economy ever did.  But observation over modern history does not turn up alternatives to the modern economy that deliver less inequality and less instability while delivering no less of the good life.

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… but so, too, has the value of this education.  See this graph offered today by the brilliant Kevin Murphy at a Hoover Institution conference, in honor of the late Gary Becker, on inequality.


This graph shows, for the United States from the early 1960s, the average annual monetary-income return to each year of college education.  For this time period, these returns reached a low in the mid-1970s – looks like a mere two years before I started college in 1976 – and began rising impressively starting in 1981.  These returns have leveled out (with some year-to-year variability, of course) since about 2000.

When an asset – in this case, college-crafted human capital – becomes more productive, it’s neither a surprise nor a ‘market failure’ for the cost of acquiring that asset to rise.  (Note that I am not suggesting that all, or even most, of the rise in inflation-adjusted tuition rates for colleges in the U.S. is due to the rising return to collegiate education.  I suggest – following Kevin Murphy [and many others] – that this increasing real return is part of the reason for the rise in tuition rates.   I have no doubt that other, less savory factors are also in play.)

See also this related 2007 essay by Becker and Murphy.

And one wonders what further information would be revealed if the salaries paid to persons who majored in subjects such as engineering, accounting, finance, economics, and nursing are separated out from the salaries paid to persons who majored in any of the various ‘I’m-Outraged-that-Society-Doesn’t-Fit-My-Idea-of-Perfection Studies.”

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… is from page 108 of Steve Pejovich’s 1983 essay “Codetermination in the West: The Case of Germany,” which is chapter 8 of the superb 1983 collection, edited by Pejovich, Philosophical and Economic Foundations of Capitalism:

The point is, of course, that parties to a contract can identify opportunities for exchange, determine their own trade-offs (which are not likely to be the same for all firms), and negotiate terms of exchange at a lower cost than a third party could possibly do it for them.  While law applies equally to all firms, voluntary contracts allow the owner and his workers to identify and exploit opportunities that are specific to their firm.

Voluntary contracting – a process that includes each individual’s right to reject offered contract terms – promotes genuinely diverse outcomes that better satisfy the nuances of each person’s situation and preferences.  Government-imposed regulations, such as minimum-wage legislation, reduce this diversity and cause outcomes, on the whole, to be less appealing to all parties involved.

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Benefits Are Not Costs

by Don Boudreaux on September 25, 2014

in Myths and Fallacies, Seen and Unseen, Technology, Trade

Here’s a letter to an e-mail correspondent (who sent a similar e-mail, I gather, to my great colleague Walter Williams):

Dear Mr. B__________:

Disturbed at my and my colleagues’ support for free trade, you ask “how much does a cheap Chinese toaster at the big box store really cost after you factor in the unemployment it caused?”

Contrary to your supposition, labor saved by economic activities is a benefit of such activities rather than a cost.  Consider the washing machine in your home.  It’s a benefit to you precisely because of the labor that it saves you from having to exert to wash your clothes on a washboard.  Your washing machine enables you to enjoy clean clothes plus whatever activities you pursue using the time that you would have otherwise spent washing your clothes by hand.  That labor-saving device makes you richer.  And likewise with trade, which is a technique for saving labor.

So just as you would not describe the labor that your washing machine saves you as a cost of washing machines, you should refrain from describing the labor that trade saves an economy as a cost of trade.  It is not a cost of trade; it is a benefit.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​

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Bonus Quotation of the Day…

by Don Boudreaux on September 25, 2014

in Inequality, Seen and Unseen

… is Kevin Erdmann’s comment on David Henderson’s recent EconLog post, “Spot the Problem“:

Between 1967 and 2003, the poverty rate among single mother households fell dramatically, from 51% to 37%. But, on net, for every single mother household that rose out of poverty, 6 new single mother households were formed, of which, 2 now are in poverty.

Every day in this country, some version of this conversation happens countless times:

“Hey Sam. I’ve got some extra work down at the shop, if you want to come earn some spending money.”

“Sorry, I can’t. I might lose my disability support.”

I don’t point this out to disparage Sam, but to say, what kind of monsters would put Sam in a position where he has to say this?

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Jonathan Adler and Michael Cannon expose the flimsiness of proffered excuses to overturn Halbig v. Burwell. A slice:

Nor does the statute support a contrary interpretation “when read in its entirety.” Tellingly, the economists [who challenge the ruling in Halbig] cite no statutory language authorizing the government to tax the plaintiffs. Nor do they offer contemporaneous statements from the law’s authors supporting their reinterpretation.

Nor is the claim that Congress intended to withhold subsidies in those 36 states “absurd.” Withholding federal subsidies in uncooperative states is how Congress sought to induce states to implement Obamacare’s other major coverage expansion, too. As enacted, the legislation threatened to withhold 12 times as much funding — and to deny health coverage to the poorest of the poor — in states that did not expand their Medicaid programs. As we write, Obamacare is revoking exchange subsidies from hundreds of thousands of enrollees based on residency status and income.

No Obamacare supporter wanted to take coverage away from the poorest of the poor. Yet not even Mr. Aaron, Mr. Cutler or Mr. Orszag could deny that is precisely how Congress intended the law to operate.

Sarah Skwire highlights yet another reason to be glad that we inhabit the modern, innovation-filled world.

Howie Baetjer was inspired by one of Russ’s recent EconTalk episodes.

In the Washington Post, Andres Martinez writes sensibly about tax inversions.

Adam C. Smith’s and Bruce Yandle’s new and must-read book is now out: Bootleggers & Baptists.  Bruce’s 1983 Regulation essay is the seed of this research.  See also this LearnLiberty video.  (Adam, by the way, earned his PhD in economics at GMU – and he is the great Bruce Yandle’s grandson.)

The Fraser Institute has forthcoming some great “Ask the Expert” web seminars.

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