Quotation of the Day…

by Don Boudreaux on November 17, 2014

in Other People's Money

… is from page 237 of Michael Huemer’s 2013 book, The Problem of Political Authority (footnote omitted):

Due to their monopolistic positions, governments can afford to make extremely large and costly errors without fear of being supplanted.  For example, the estimated combined cost of the U.S. wars in Iraq and Afghanistan is $2.4 trillion, and yet the U.S. government need fear no loss of market share as a result of this dubious investment.  If each American could choose between a government that carried on these wars and one that did not and if each individual were guaranteed to actually get what he chose, then even the most ardent hawks might find themselves thinking twice about the price tag.  Fortunately for the government, individuals have no such choice.

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Quotation of the Day…

by Don Boudreaux on November 16, 2014

in Man of System

… is from page 4 of the 1989 revised edition of David Friedman’s 1973 book, The Machinery of Freedom; (this indispensable book is available on-line for free):

The direct use of physical force is so poor a solution to the problem of limited resources that it is commonly employed only by small children and great nations.

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For those of you in the Bay Area, today (Sunday) at 9:00am PST, Adam C. Smith will discuss the new book that he wrote with his grandfather Bruce Yandle, entitled Bootleggers and Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics, on The Bob Zadek Show.  You can catch it on radio station 910AM.

Scott Sumner nails it here on the question of allowing a free-market in kidneys to develop.  A slice:

Think about how America has freaked out about the nonexistent threat from Ebola. Now imagine that a Boeing jet carry [sic] 210 passengers crashed once a week as a result of terrorism.  [Each week in the U.S., the shortage of transplantable human kidneys causes an estimated 210 people either to die or to become too ill for transplants.] How much money would we spend beefing up airport security?

At this point people tell me that I’m just an unimaginative utilitarian. There are other issues at stake; human dignity, natural rights, etc., etc. OK, let’s return to the one Boeing a week crashes hypothesis. What sort of indignities would Americans meekly put up with at airports in that case? How many “natural rights” would they give up in a heartbeat? The truth is that human dignity and natural rights don’t explain our lack of a kidney market, it’s ignorance on the part of the public. If they understood the gains they’d accept the market immediately, even if they had to accept these costs. Just as they’d accept tighter airport security, at a cost of freedom and dignity, if terrorism got that bad.

Another problem is “cognitive illusions.” People are hardwired (or taught?) to think that money taints certain types of transactions, but not others. Other bloggers have explained this problem much better than I can. My point here is that these cognitive illusions (smokers deserve to pay for their sins, drug users deserve to be put in prison, money taints transactions, etc) are not costless. Indeed they create some of the very worst evils in our society.

On this general topic of useful and humane markets being squelched by superstition and economic ignorance (often mixed with more than a dash of interest-group greed), my vanity compels me to link to this 1995 article of mine calling for a liberalized market in infant adoptions.

Steven J. Davis and John Haltiwanger explain the importance of labor-market fluidity.

Ryan Bourne identifies ten errors that frequently arise in discussions of economic inequality.

Per-capita, inflation-adjusted spending by the U.S. government, 1945-present.

Finally, apropos nothing: I love this picture of the Beatles.

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James Grant on The Forgotten Depression

by Don Boudreaux on November 16, 2014

in Books, History, Monetary Policy

At lunchtime on Tuesday, Jim Grant will speak at the Cato Institute headquarters about his new book, The Forgotten Depression.  If you’re in the DC metro area, do consider attending.  I’ll be there.  Here’s the announcement:

Featuring the author James Grant, Publisher, Grant’s Interest Rate Observer; with comments by Jim Powell, Senior Fellow, Cato Institute; and Lawrence H. White, Professor of Economics, George Mason University, and Senior Fellow, Cato Institute; moderated by George Selgin, Director, Center for Monetary and Financial Alternatives, Cato Institute.

What happens if you throw a depression and nobody from the government shows up? No Quantitative Easers or fiscal stimulators or financial-firm rescuers? And what would happen if, instead of lowering interest rates and spending more to spur recovery, the government did nothing? The answer, in 1921 at least, is that the economy not only recovers but is “roaring” in less than two years. Was “The Crash that Cured Itself,” as the subtitle of James Grant’s fascinating new book refers to it, a fluke, or does it offer useful lessons for today’s erstwhile depression fighters?Join us to hear James Grant, Jim Powell, and Lawrence H. White discuss this and other important questions raised by Grant’s stimulating new book.

If you can’t make it to the Cato Institute, watch this event live online at www.cato.org/live and follow @CatoEvents on Twitter to get future event updates, live streams, and videos from the Cato Institute.

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For Law Geeks

by Don Boudreaux on November 15, 2014

in Law, Not from the Onion, Seen and Unseen

If Barack Obama ever returns to teaching constitutional law, he has just given evidence that he will likely instruct his class that the infamous 1942 case of Wickard v. Filburn was decided incorrectly.  Here’s a paragraph from a Wall Street Journal report on Mr. Obama’s response to a reporter who asked him about the Keystone XL pipeline:

In off-the-cuff remarks, Mr. Obama managed to insult our great northern neighbors while suggesting that the project would be no help to U.S. workers or consumers. “Understand what this project is: It is providing the ability of Canada to pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else. It doesn’t have an impact on U.S. gas prices.”

(Remind me again why so many people think that “Progressive” politicians, such as Obama, are smart.  As the WSJ report rightly notes, this remark by the supposed science-guided genius who currently lives in the White House is evidence of a profound lack of the most basic understanding of economics.)

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Quotation of the Day…

by Don Boudreaux on November 15, 2014

in Nanny State, Seen and Unseen

… is from page 152 of Randy Holcombe’s excellent 1995 book, Public Policy and the Quality of Life:

If drugs were legalized, there would not be the same incentives to produce drugs in concentrated doses.  Transportation is more costly for illegal drugs because they must be concealed from law enforcement officers.  Drugs that can contain more doses in a given volume will be more valuable, and one of the motivations of designer drugs is to allow easier transportation through more concentrated doses.  Using alcohol as an example, high-proof liquor was more often produced than beer with low alcohol content during prohibition.  Legalization would result in drugs that are not as strong.

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Quotation of the Day…

by Don Boudreaux on November 14, 2014

in Economics, Man of System, Myths and Fallacies, Scientism

… is from page 12 of Russ’s new and wonderful book, How Adam Smith Can Change Your Life:

Unfortunately, what the media and the public expect from economists is what we are probably worst at – giving precise answers to questions that presume the economy is like some giant clock or machine whose innards can be mastered and then manipulated with some degree of precision.

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by Don Boudreaux on November 13, 2014

in Health, Hubris and humility, Man of System, Nanny State

My take on GruberGate is straightforward – perhaps boringly so.

Obamacare’s chief academic architect, Jonathan Gruber, is caught on camera admitting frankly, and without remorse, that important parts of Obamacare were sold to the public under false pretenses.  Gruber does express regret that voters are afflicted with too much “stupidity” to enable them to see that such legislation is (or so believes Gruber) in their best interest.  But given this regrettable reality of the political process, deception is in order.  Deception and lies and duplicity are proper.

I’m prepared to accept David Friedman’s explanation that, had Gruber spoken with more care, Gruber would have described voters as being “rationally ignorant” rather than as being afflicted with “stupidity.”  (There’s a difference between stupidity and rational ignorance: Albert Einstein likely did not know all of the rules of American football, but this fact is no evidence of any stupidity on his part.  Rather, it is merely the consequence of the reality that it didn’t pay Einstein to spend sufficient time to learn the rules of that game.  Other uses of his scarce time were more valuable to him personally.  So the emphatically unstupid Einstein was rationally ignorant of the rules of American football.)  Precisely because the typical voter is not stupid, the typical voter understands that his or her vote will not determine the outcome of any election.  The typical voter, therefore, spends his or her scarce time gathering information about matters over which he or she does exercise meaningful control – for example, studying for the calculus exam to increase the chances of scoring a higher grade, or writing sonnets to a beloved other to increase the chances of scoring – rather than about matters (the outcomes of political elections) over which he or she exercises no meaningful control whatsoever.

Yet the reality of voters’ rational ignorance is one of the chief reasons why public-choice scholars argue that political choices are often less prudent and less sensible than are choices made by people in private markets – and why special-interest groups have a much greater chance of co-opting political processes than they have of co-opting market processes.

Put differently, the reality of public choice is among the main reasons given by public-choice scholars for why political outcomes will often be less desirable than they are imagined to be by those who are enthusiastic about democratic politics.  Even democratic political processes that are inclusive and non-corrupt feature inordinate amounts of free-riding and other ‘market-failure’ flaws that render such processes much less likely to work to promote the general welfare than the champions of politics suppose.  Politics neither performs miracles nor is itself blessed by miracles.

So Jonathan Gruber simply admits that the very process that people on the left romanticize and celebrate – democratic politics – isn’t what it’s cracked up to be.  Of course, libertarians and public-choice scholars say the same.  The difference between the Jonathan Grubers of the world and the Russ Robertses and Bryan Caplans of the world is that the former believe that politics is still commendable as long as good, smart people (such as Gruber) are performing deceptions necessary to trick voters into supporting policies that good, smart people somehow divine are best for the masses, while the latter believe that the very need to deceive rationally ignorant (indeed, rationally irrational) voters is itself a major flaw in politics – a flaw that makes politics far less reliable and admirable than competitive, private markets.

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Writing in yesterday’s Wall Street Jounal, Phil Gramm and Michael Solon summarize the findings of the important new paper, in the current issue of the Southern Economic Journal, by Philip Armour, Richard V. Burkhauser, and Jeffrey Larrimore - a paper that exposes several fundamental problems with the Piketty-Saez data on income inequality in the United States.  Some slices from Gramm and Solon:

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

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Quotation of the Day…

by Don Boudreaux on November 13, 2014

in Hayek, Man of System

… is from page 147 of the 1976 Vol. II (“The Mirage of Social Justice”) of F.A. Hayek’s Law, Legislation, and Liberty:

It should be realized, however, that the ideals of socialism (or of ‘social justice’) which … prove so attractive, do not really offer a new moral but merely appeal to instincts inherited from an earlier type of society.  They are an atavism, a vain attempt to impose upon the Open Society the morals of the tribal society which, if it prevails, must not only destroy the Great Society but would also greatly threaten the survival of the large numbers to which some three hundred years of a market order have enabled mankind to grow.

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