Some Links

by Don Boudreaux on September 22, 2017

in Crony Capitalism, Environment, Immigration, Legal Issues, Media, Trade

George Will is wise.

Also wise is my former student, Alex Nowrasteh.

Phil Levy is justifiably unimpressed with U.S. Commerce secretary Wilbur Ross’s take on NAFTA’s consequences.  (HT Bryan Riley)

Speaking of the seemingly bottomless ignorance about trade of Trumpians, my great Mercatus Center colleague Dan Griswold adds his clear voice to those who explain that Steve Bannon’s understanding of economic history is a misunderstanding.

David Henderson offers more evidence – as if more is needed – that that teller of fabulist tales, Nancy MacLean, paints a distorted portrait of my late colleague Jim Buchanan.

Matt Ridley explains that the costs of today’s climate policies fall disproportionately on the poor.

Ron Bailey asks if the Colorado River has rights.

Iain Murray is none too happy with London’s antediluvian ban on Uber.

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Trump’s Trade Policy is Not ‘Optimal’

by Don Boudreaux on September 22, 2017

in Trade

This note is to a college student who often writes to berate me for my failure to appreciate the economic genius of his hero, Donald Trump.

Mr. Jake Ricci

Jake:

Thanks for your e-mail.  You write that Trump’s protectionism “reflects his intuitive grasp of optimal tariff theory.”

I disagree strongly, for two reasons.  First, because Trump exhibits no grasp, intuitive or otherwise, of basic economics, it’s impossible to believe that he intuitively grasps a concept requiring an understanding of more advanced economics.

Second and far more importantly, the optimal tariff (if and when the rare conditions for its successful use in reality exist) is a tool for increasing the amount of imports a country receives in exchange for any given amount of its exports.  As Richmond Fed economist Tom Humphrey explains, a country that imposes an optimal tariff “renders its imports cheaper and its exports dearer such that it obtains a larger quantity of imports per unit of exports given up.”

This outcome is the opposite of what Trump routinely demands.  Every syllable barked by him and his trade advisors makes clear that their goal is nothing more sophisticated than the unvarnished and long-discredited mercantilist quest for domestic citizens to export as much as possible and to receive in exchange as few imports as possible.

Trump wants to make you rich by reducing your access to goods and services.  Good luck with that.

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

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… is from pages 265-266 of Ron Bailey’s insightful and learned 2015 book, The End of Doom:

It is unfortunately the case that government meddling on a global scale has massively distorted energy markets through pervasive subsidies, mandates, and price controls.  The result is retarded innovation in the technologies of energy generation.  A big first step toward renovating our energy supply systems would be to eliminate those impediments to understanding the real competitive benefits and costs of the production and use of energy.  Ultimately, the better and far more effective way to ameliorate and avert future climate change is to mobilize human ingenuity through market processes to drive down the costs of no-carbon energy sources.

DBx: Among the many reasons that I oppose a Pigouvian tax on carbon emissions is that calling for such a tax strikes me as being akin, say, to homeowners whose homes have been routinely vandalized calling on the vandals to vandalize also the factories that produce the spray paint, sledge hammers, and crow bars used by vandals.  Such vandalization would indeed reduce the amounts produced of these outputs and thereby reduce the amount of vandalism suffered by homeowners by making vandalism more costly.  (I note, by the way, that the affected factory outputs are used not only for bad purposes but also, and mainly, for good purposes.)

My vandal analogy is imperfect, I know, but it does point to the consistent failure of most Pigouvian-tax proponents to account for public-choice considerations.

Let’s assume, contrary to fact, that it’s possible to accurately calculate the difference between what Pigou called (in his The Economics of Welfare) the “marginal social net product” of industries that use carbon energy as an input and the “marginal private net product” of those industries and then, also, to accurately calculate the tax (or, more realistically, the vast and ever-changing schedule of taxes) that would cause all producers to reduce their outputs to ‘socially optimal’ levels.  (“Product” here means, loosely speaking, ‘rate of output.’)  What good reason is there to believe that the same agency – the state – that has routinely distorted energy, and other, markets in ways that few can doubt deliver concentrated private benefits to the relatively few at the larger expense of the general public will reliably implement and enforce such an optimal tax?  In what part of the analysis is it shown that government becomes a faithful and apolitical social engineer?  All such demonstrations, as far I’m aware, include the assumption of a miracle.

Once again, if it’s an acceptable scientific move simply to assume that individuals in institutional setting X act with more knowledge and less self-interest than they act with in institutional setting Y, then it’s an acceptable scientific move to assume that individuals in institutional setting Y act with more knowledge and less self-interest than they act with in institutional setting X.  It is, therefore, no longer justifiable to conclude that any problems that arise from the fact that individuals in institutional setting Y act with too little information and too much self-interest will be solved by empowering individuals in institutional setting X to override the decisions of individuals in institutional setting Y.  (Let X be “government” and Y be “private sector.”)

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Bonus Quotation of the Day…

by Don Boudreaux on September 21, 2017

in Myths and Fallacies, Property Rights

… is from page 5 of the great Harold Demsetz’s insightful 2011 Review of Law & Economics article, “The Problem of Social Cost: What Problem? A Critique of the Reasoning of A.C. Pigou and R.H. Coase“:

I want to recognize Coase’s important demonstration that it makes no more sense to speak of A harming B than of B harming A when A and B seek to put the same scarce resource to competing uses.  The history of prior discussion of the externality problem is replete with mistaken attribution of causation when the real source of the problem simply is resource scarcity.

DBx: No externality, so called, in a market setting is unilateral.  All such ‘externalities’ are merely conflicts over the use of scarce resources.

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Quotation of the Day…

by Don Boudreaux on September 21, 2017

in Complexity & Emergence, Myths and Fallacies

… is from page 275 of my late Nobel laureate colleague Jim Buchanan‘s January 1989 Business Economics article, “On the Structure of an Economy,” as this article is reprinted in James M. Buchanan, Federalism, Liberty, and Law (2001), which is volume 18 of the Collected Works of James M. Buchanan:

Let us by all means continue to strive for, and to support, efforts to analyze the structure of the economy, and to seek consensus on means to make this structure more capable of allowing us, as individual participants, to further those separately defined objectives that we seek.  Let us, however, guard against allowing intellectual confusion about what an economy is to offer legitimizing cover for the efforts of some persons and groups to impose their own purposes on others.  Beware of those who pronounce on the economy’s purpose.

DBx:  A regional or national or global economy has no purpose.  What we call “the economy” is the complex, unintended result of the pursuit by, today, each of several billion individuals of his or her individual goals.  (These goals, of course, might be heavily influenced by the choices of others.  These goals are also often pursued in voluntary tandem with others, as when individuals form a business firm.)  Talking, for example, about ‘the purpose’ of the American economy makes no more sense than talking about ‘the purpose’ of the English language.  As with a functioning language, an economy that works well enables each of the many individuals whose actions give rise to it the opportunity to better achieve his or her goals, but it itself has no goal or purpose.

Individuals have goals; economies do not.

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Among the most destructive of the many zombie-like myths that continue to haunt the ideological and political landscape is the one that insists that because the U.S. government did not in the 19th century follow a policy of free trade, and because the American economy in the 19th century did grow very impressively, Uncle Sam’s tariffs are therefore responsible for – or at least helped to promote – this impressive economic growth.

Dartmouth economist Doug Irwin has done the definitive research on this specific question and finds the assertion indeed to be a myth.  Here’s a version of Doug’s pioneering paper, from 2000, on the matter.  And here’s the abstract of Doug’s paper:

Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.

Surprising no one, the woefully economically ignorant Steve Bannon is among the many people who today trumpet the myth that tariffs promote economic growth.  Fortunately, Doug has a superb op-ed in today’s Wall Street Journal warning people to dismiss such economic misinformation that spills from the mouths and keyboards of Bannon and other economic nationalists.  Some slices:

Mr. Bannon’s simple story is historically and economically off base. As Treasury secretary, Alexander Hamilton wanted moderate tariffs, not protectionist duties. In his day, tariffs accounted for nearly all federal revenue. He wanted to keep imports flowing so he could finance the federal government’s Revolutionary War debt and secure the young nation’s credit. President Polk, far from being a protectionist, was a small-government Democrat. He slashed tariffs dramatically in 1846.

….

Economic nationalists always conveniently skip the story of the 1930 Smoot-Hawley tariff, probably because it doesn’t fit their narrative. Smoot-Hawley—passed by Republicans and signed by a Republican president—didn’t cause the Great Depression, but the trade wars it inspired certainly damaged the world economy and backfired badly against the United States.

More important, America didn’t boom during the 19th century because it was a closed economy. The U.S. industrialized rapidly between 1833 and 1860, when tariffs were being cut. While tariffs were high after the Civil War, the U.S. was open to foreign capital inflows. It was also open to the best industrial technology from Britain and Germany, and—importantly given Mr. Bannon’s assertion that the U.S. had control of its borders back then—to massive immigration. The textile mills and steel furnaces of the late 19th century were largely staffed by foreign-born workers. As in our own era, many native-born Americans weren’t interested in doing tedious and grinding jobs at low wages.

….

Economic nationalists say their protectionist program will ignite an economic boom. In fact their poor understanding of history will damage the American economy and leave the country weaker.

(By the way, in November Doug’s long-awaited book on U.S. trade-policy history – Clashing over Commerce – will be published by the University of Chicago Press.  I strongly recommend that you do as I’ve done and pre-order it here.)

Doug wisely mentions, in his op-ed, 19th-century America’s policy of largely open immigration.  On this very point see this important paper by Cecil Bohanon and T. Norman Van Cott.

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Quotation of the Day…

by Don Boudreaux on September 20, 2017

in Economics, Myths and Fallacies

… is from page 190 of Michael Huemer’s brilliant and important 2013 book, The Problem of Political Authority (emphasis added; footnote deleted):

[I]magine that you were to learn that you are going to die tomorrow.  Though it may be impossible to imagine accurately how you would feel, it is a safe guess that you would be quite upset.  Now I will tell you something that you probably do not know: based on recent worldwide mortality statistics, there are about 156,000 human beings who will in fact die tomorrow.  How do you feel now?  You may find this information disturbing.  But if you are like most people, you are far less upset at this news than you would be by the news that you yourself were about to die.  This suggests, again, that your concern for yourself is perhaps thousands of times stronger than your concern for most other people.

DBx: Notice that Huemer writes here at the end “most other people.”  He’s correct to do so because, obviously, the deep concern that each of us has for ourselves is a concern that each of us has for a small handful of other individuals who we love.  Indeed, like the typical parent, I would be more upset were I to learn that my son will die tomorrow than were I to learn that I will die tomorrow – and this latter news would cause me great anguish.  Contrary to some uninformed claims, the assumption used by economists and other competent social scientists that individuals are self-interested is not the assumption that each person cares only about himself.  And much less is this assumption that each person cares only about maximizing the amount of material stuff – or, more ridiculous still, the amount of money – that he or she (or his or her family) possesses.  Yet for those who are intent on rejecting the lessons of sound economics, a cheap avenue to that end is to caricature the so-called “self-interest assumption.”  If this assumption is made to appear sufficiently unrealistic, then people can be persuaded to ignore or to reject any analysis that has that assumption as part of its base.

The assumption of self-interest used by competent social scientists is that each individual has spheres of concern, with that individual and his or her loved ones at the innermost sphere.  But each individual is recognized to have concern – genuine concern – also for many people in spheres not at the center.  For example, I care deeply about each of my three siblings, but the intensity of my care for them is not as great as is the intensity of my care for my son.  Also, I care greatly about my GMU Econ and Mercatus Center colleagues – some more intensely than others because I know some of them better than I know others.  But the intensity of my concern even for the colleagues who are dearest to me is not quite as strong as is my concern for each of my siblings.

Obviously, the number of persons that each of us knows is a tiny fraction of the number of persons currently alive.  You might think it to be ethically horrendous, but the plain fact is that each person cares more about himself, his loved ones, and his neighbors, friends, and colleagues than he cares about any of the billions of strangers whom he neither knows nor knows of in any specific way.

To interpret, as some poor ‘scholars’ do, this observation about self-interest – and its use as an assumption in economic analyses – as evidence that economists project unseemly motives on the agents who populate their analyses is a reflection of spectacular misunderstanding.  Such a display of misunderstanding would cause almost insufferable embarrassment to anyone who displayed it if that person understood his or her error.  But the terrific magnitude of the very ignorance that leads to such a misunderstanding protects the person who displays it from ever grasping just how ridiculous his or her misunderstanding is.

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Why Democracy?

by Don Boudreaux on September 19, 2017

in Philosophy of Freedom

In my most recent Pittsburgh Tribune-Review column I argue that the American founders regarded democracy as a means and not as an end in itself.  A slice:

Even passing familiarity with U.S. history and the Constitution makes crystal-clear that the Framers were no gung-ho enthusiasts for majoritarian rule. They feared it because they feared government. Democracy — checked, balanced and limited — simply supplied the least-perilous ground upon which to erect a government able to perform what few tasks the Framers believed it should.

This historical reality is lost on many modern-day fans of democracy. They talk and write — and sometimes scream — as if it is criminal even to suggest that today’s majority ought not be allowed to do whatever it votes to do. For these naïve democrats, democracy — or, worse, majoritarian rule — is not a means of enabling government to do what it should and keeping it from doing what it shouldn’t. Instead, democracy is an end in itself, individual freedom be damned. This attitude is dangerous.

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… is from pages 189-190 of James Gwartney’s insightful 2013 paper “The Public Choice Revolution and Principles of Economics Texts,” which is chapter 13 of Public Choice, Past and Present: The Legacy of James M. Buchanan and Gordon Tullock (Dwight R. Lee, editor, 2013) (original emphasis):​

The omission of public choice from mainstream economics creates a central planning mentality.  For the mainstream economist, economics is about deriving ideal solutions under restrictive assumptions.  Essential information such as consumer preferences, costs of production, rate of return for alternative investments, and size of spillover effects are generally assumed to be known.  For the proponents of this approach, economic analysis involves the derivation of “optimal” levels of taxation, subsidies, distribution of income, budget deficits, government spending, and dozens of other key variables within models containing known information.  In this fantasy world, economics is about deriving ideal solutions to multi-equation mathematical models.  This approach makes economics look highly sophisticated, and its practitioners appear to be engineering geniuses.  No doubt, the sophistication of such models is a contributing factor to their popularity at elite schools.

But, there are numerous problems with this approach.  The information incorporated into the models is generally unavailable to any central authority.  The supposed “ideal” solutions often alter incentives and generate secondary effects that undermine the validity of the models.  Most importantly, as public choice analysis reveals, the real-world political decision makers will be more interested in votes and winning the next election than the adoption of supposed ideal solutions.

DBx: If a clever teenager masters a particular video game we might all admire the teen’s dedication to the game and the native smarts that his or her mastery of the game perhaps indicates.  But we would never conclude that this teenager should therefore be employed to advise government officials on how to go about manipulating whatever policy tools are at these government-officials’ fingertips.  Economists who master this model or that econometric technique are very much akin to a clever teenager who masters a particular video game.  Both are good – perhaps very good – at playing games.  Neither, however, knows enough about reality outside of his or her make-believe world to be of much use in helping others to understand – and much less to ‘engineer’ – that reality.

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John Cochrane reveals the fundamental flaw at the heart of the “stranded profits” argument.  A slice:

(The following is a story, not a fact about Apple accounting.) Apple sells an Iphone in Spain. Apple Spain pays a huge licensing fee on software, owned by Apple Ireland, so it’s not a profit in Spain. Apple Ireland thus collects huge amounts of cash from all over the world, taxed at the low Irish corporate tax rate. Apple Ireland deposits this cash in an Irish bank. (I presume they do fancier things with the money, but I’m telling a story here). The cash is “stranded” overseas, right?

No. The Irish bank can lend the money anywhere. It can buy US mortgage backed securities, it can lend the money wholesale to US banks who lend it out to US businesses. It can even lend the money to Apple US. If Apple or any other US company wants to invest, they can borrow from the Irish bank. Conversely, if profits are repatriated to US banks, those banks can lend the money overseas.

Philip Booth calls on left-wing scholars and pundits to get public-choice straight.

Omar Al Ubaydli reminds us of some important disaster-relief lessons from hurricane Katrina.

Speaking of hurricanes, my former student Emily Hamilton adds her clear voice to those who note that Houston’s lack of land-use planning by government contributed to that city’s Harvey woes.

Gary Wolfram summarizes key elements of the case against minimum wages.

Here’s the closing line of Sheldon Richman’s excellent defense of so-called “price gouging”:

The question remains: do we want to feel good, or do we want people to have the goods they need?

Richard Epstein writes about the fatal allure of single-payer health care.

George Selgin offer his two (per)cents.

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