Quotation of the Day…

by Don Boudreaux on June 25, 2016

in Law

… is from page 174 of Michael Huemer’s excellent 2013 book, The Problem of Political Authority:

When the justice of a law is controversial, it is better to err on the side of freedom than on the side of restriction.  Perhaps some just laws would, unfortunately, go unenforced.  But the reduction in the number of people wrongly punished under unjust laws would more than compensate for this disadvantage.  It is widely held that it is better for ten guilty people to go free than for one innocent person to be punished.  If this is true, then it is also better for ten people to fail to be convicted under just laws than for one person to be convicted under an unjust law.  Our present system, however, errs very much in the opposite direction: even when the moral status of a law is in doubt, police officers, judges, and juries almost always enforce the law without question.

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is from Matt Ridley’s essay in the June 22nd edition of the Wall Street Journal:

Even worse than in Westminster or Washington, the corridors of Brussels are crawling with lobbyists for big companies, big banks and big environmental pressure groups seeking rules that work as barriers to entry for smaller firms and newer ideas. The Volkswagen emissions scandal came from a big company bullying the EU into rules that suited it and poisoned us. The anti-vaping rules in the latest Tobacco Products Directive, which will slow the decline of smoking, came from lobbying by big pharmaceutical companies trying to defend the market share of their nicotine patches and gums. The de facto ban on genetically modified organisms is at the behest of big green groups, many of which receive huge grants from Brussels.

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Over at Alt-M, George Selgin shares his thoughts from the road.

GMU Econ alum – and British resident – Emily Skarbek has some early thoughts on the reality of Brexit.

George Will offers sage counsel to Republicans: Ditch Donald Trump.

Charles Lane summarizes many of the problems with a guaranteed minimum income.

Barry Brownstein draws important lessons for life from Adam Smith.

Mike Munger is always worth reading.

Also always worth reading is my former professor Randy Holcombe, who here examines the relationship between “Progressivism” and freedom.  Here’s Randy’s conclusion:

Freedom is meaningless if we are only free to make choices that meet with government approval. The Progressive ideology compromises freedom and takes away the individual rights that at one time justified the existence of our American government.

Progressivism is a direct attack on freedom.

Michael Barone likes Arnold Kling’s new book.

Sarah Skwire is correct: toying with freedom is like playing Jenga.

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… is from page 113 of Matt Ridley’s splendid 2015 book, The Evolution of Everything:

It is axiomatic among right-thinking people that there are many things the market cannot provide, and therefore the state must.  The sheer magical mysticism inherent in this thought is rarely examined.  Because the market cannot do something, why must we assume that the state knows better how to do it?

Indeed.  When the case for state action is examined carefully, more often than not one discovers that the conclusion that the state will out-perform the best feasible – or even the actually prevailing – market arrangements is built into the assumptions of that case.  For example, the case for state action typically assumes that government officials have more and better information than do private market actors about the countless details that must be known and taken into account if resources are to be allocated as efficiently as possible.  This case also typically assumes that government officials act as faithful agents of the public.  In almost all real-world situations both of these assumptions are mistaken.

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EconLog commenter Jon (who is not Jon Murphy) read with disapproval this comment by EconLog commenter John hare:

Minimum wage is an attempt to extract by force that which one is unable to earn by right.

Jon responded; his response is reproduced below in full:

Exactly! We have an underclass of people who, left on their own, would be very unlikely to earn a living wage by right (and, of course, the current minimum wage is not a living wage). So what do you suggest we do with these people?

Jon’s defense of the minimum wage is strong evidence that the world does indeed include people who really do believe that government-officials’ stated intentions determine the outcomes of government actions.  Jon writes as though minimum-wage legislation really does improve the lives of the (as he describes them) “underclass of people who, left on their own, would be very unlikely to earn a living wage.”  Judging from this comment (and from some of his other comments at EconLog), Jon doesn’t even bother to consider the possibility that the minimum wage might not raise incomes in the way that he supposes that it does and that its proponents claim it will.

Another error is revealed by Jon’s question, “So what do you suggest we do with these people?”  Even if it were true that the United States has lots of people who “left on their own … would be very unlikely to earn a living wage” – and if it were also true that John hare and every other opponent of the minimum wage can offer no good ‘solution’ for how to improve the economic well-being of such people – it does not follow that the minimum wage is, therefore, a policy that will help to improve the economic well-being of such people.  If Smith advises Jones not to drink a gallon of gasoline by pointing out to 65-year-old Jones that drinking gasoline will, contrary to Jones’s stated belief, not only not turn Jones again into a 25-year-old man but will instead kill him, Jones would be mad – and illogical – to respond by asking rhetorically: ‘So what do you suggest I do to turn myself again into a 25-year-old man?’  Not all problems have solutions, and certainly the failure to offer a solution to a problem does not imply that the proposed solution currently under consideration will work or should be tried.

Jon’s response to John hare also suggests that Jon believes that prices and wages are rather arbitrary numbers the only function of which is to determine  how a fixed-sized economic pie is sliced.  Raising the minimum wage will (apparently in Jon’s view) cut bigger slices for low-skilled workers by cutting smaller slices for business owners and others.  There is in Jon’s comment no evidence whatsoever that he is even aware of (much less that he has a response to) the concern that the minimum wage prices out of jobs the very workers that Jon understandably seeks to help.

Finally, this unawareness on Jon’s part (which, I do not doubt, he shares with the vast majority of minimum-wage supporters) makes it fair to ask Jon the following question: What line of reasoning leads you, Jon, to believe that people who are so unskilled and inept that when “left on their own” they are incapable of earning a “living wage” will continue to be attractive to employers when the government prohibits these unfortunate workers from offering to work at hourly wages below the wages that are currently paid to more skilled and competent workers?

UPDATE: Incoming GMU Econ PhD student Jon Murphy – again, not the “Jon” discussed above – asks wisely in the comments section to this post “I wonder if he [EconLog commenter Jon] is aware that the minimum wage was established precisely to keep such an underclass out of the workforce?”  My guess is that the answer is ‘no.’

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When I teach Principles of Microeconomics (which I do throughout the year at George Mason University) I include a few hours of discussion of public-choice economics (which was pioneered by my late GMU colleagues Jim Buchanan and Gordon Tullock).  Public-choice economics offers more plausible explanations of government activities than are offered by competing theories of state action.  One of the core propositions of public choice is that policies the benefits of which are concentrated on a relatively small number of people, but the costs of which are shared by large numbers of people, have a disproportionately high chance of being enacted and retained even if the total costs to society of these policies exceed their total benefits.  It’s called the special-interest-group effect.

Explanations of (for example) tariffs, of occupational licensing, and of subsidies to businesses make little sense if they do not feature, prominently, recognition of the role of special-interest groups whose members share in the resources stolen for them, through these policies, by politicians from the larger populace.

This new essay, on subsidies to American cotton farmers, by Joe Glauber and Daniel Sumner supplies a perfect example of the special-interest-group effect at work.  It’s an example that I’ll use in my upcoming classes:

USDA finally acquiesced to repeated requests from the cotton industry. The new subsidy will transfer about $300 million or roughly $43 per acre, to cotton farms.

The population of the U.S. today is roughly 323 million.  These 323 million people live in approximately 125 million households.  Therefore, the $300 million in subsidies to cotton farmers directly cost each man, woman, and child in America, on average, 93 cents.  Or reckoned on a household basis, these subsidies directly cost each household in America, on average, $2.40.

The subsidies also distort resource allocation beyond the immediate distorting effects of collecting these tax revenues.  I’ve no estimate of the size of that cost, but let’s offer what is almost surely an overestimate of the monetary size of this additional cost as being $700 million.  So the total cost of this subsidy is $1 billion.

On these estimates, these subsidies to cotton farmers cost each man, woman, and child in America, on average, $3.33.  Reckoned on a household basis, these subsidies cost each household in America, on average, $8.00.

There are in the U.S. approximately 18,600 cotton farms.  Therefore, each of these farms, on average, receives in subsidies $16,129.  That’s 17,343 times more money than is paid in taxes, on average, by each American to fund these subsidies (or 2,016 times more money than is the total estimated cost that each American household is forced to incur as a result of these subsidies).

So now consider the political realities.  If you’re an average American cotton farmer, you gain $16,129 from this subsidy.  To get this subsidy, or to protect it from a threatened demise, you’ll spend quite a lot of money – mainly by contributing to a fund out of which well-connected, hard-working, and silver-tongued lobbyists are hired to plead your case in Washington.  And your fellow cotton farmers will join you in this rent-seeking enterprise.

Let’s say that you and your fellow cotton farmers each pays a mere $2,000 to hire and fund a lobbying effort.  (Better to pay $2,000 to keep $16,129 than to risk losing the subsidy.)  That’s a total of $37,200,000.  With this sum, you and your fellow cotton farmers can hire some excellent, Gucci-loafered and Gucci-pumped talent to plead your case on Capitol Hill and on Independence Ave., NW.

But where’s the voice of the people who pay for this cronyist boondoggle?  How much will each household pay to oppose it?  Even if each household is aware of this boondoggle – and even if each household is so appalled at the inexcusable thievery that it is that each household is willing to pay, to fight this thievery, up to, say, four times more than this thievery costs that household – each household is willing to pay up to (drumroll)…. $32 to fight this thievery.  Therefore, households will not do much, if anything, to oppose this thievery.  Unlike with the beneficiaries of this thievery (the cotton farmers), American households share no huge, dominating interest in opposing this thievery.  Even if they were to succeed in squelching the subsidies, each household would save a mere $8.  This sum is not sufficient to unify households into a subsidy-fighting coalition.  In contrast, the average sum of $16,129 transferred to each and every cotton farmer by the subsidies is sufficient to unify cotton-farmers in to a subsidy-seeking-and-protecting coalition.

Thus, cotton subsidies exist and, as a result, American taxpayers and consumers are fleeced (excuse here the reference to wool).  And even though most Americans don’t cotton to having their money stolen by prosperous producers, the thieving survives and is called by the euphemism “agricultural policy.”

…..

The power of public choice to explain subsidies such as this cotton one grows when rational ignorance and rational irrationality are added to the explanatory mix, as well as when the amounts stolen by the winners and the amounts stolen from the victims are each discounted by the prospects that spending some of those amounts on lobbying will fail.  (The prospects of failure of each cotton-farmer’s $2,000 contribution to the lobbying effort to promote the subsidies are lower than are the prospects of failure of each household’s expenditure of $32 to oppose – say, by taking 90 minutes to compose and to send e-mails to members of Congress – to oppose the subsidies.)

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Quotation of the Day…

by Don Boudreaux on June 23, 2016

in Current Affairs

… is Virginia Postrel’s answer to the question “Clinton vs. Trump: Who’s Worse?”; her answer appears on page 29 of the August/September 2016 issue of Reason magazine (gated):

That the president of the United States should not be a self-aggrandizing, xenophobic bully who scorns the rule of law, lacks a sixth-grade knowledge of how the government works, neither appreciates nor understands the decentralized workings of the economy, and believes conspiracy theories he reads in the National Enquirer shouldn’t be something readers of Reason need to be convinced of.

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Do You Believe in Magic?

by Don Boudreaux on June 22, 2016

in Reality Is Not Optional, Seen and Unseen, Work

People who really believe that trade restrictions prevent domestic unemployment or raise domestic wages – people who really believe that minimum wages raise the incomes of low-skilled workers without causing any loss of employment or worsening of other terms of these workers’ jobs – people who really believe that government-mandated family leave leaves workers better off – are like people who attend magic shows and really believe that the magician causes a rabbit to materialize out of the thin air within the magician’s hat.

“Wow!” exclaims an audience member.  “I saw with my own eyes the magician pull a rabbit from a hat that only a moment earlier was empty!  And also, the magician assures me that that’s what he did.  He wouldn’t lie to me.  So it must be true that the magician pulled a rabbit miraculously from his hat – that he bends reality to his will.  I’m impressed!!”

These people believe their eyes.  And why shouldn’t they?  The empirical record, after all, is stuffed with rabbits being pulled from magicians’ hats – hats that audiences saw were empty just moments before live rabbits were pulled from them.  What’s not to believe?

Of course, the rabbits do indeed come from somewhere.  Naive audience members either actually believe, or they choose to believe, that the rabbits are indeed conjured out of thin air by the marvelous, smiling magicians.  Sensible audience members, in contrast, understand that much that is relevant is unseen by the audience – and that that which is unseen is key to the full story.

Digging directly into the behind-the-scenes arrangements, or using reason to piece together a plausible explanation of the likely cause for the rabbit appearing to have been conjured out of thin air, is necessary in order to adequately understand what’s really going on.  If the magician’s armed guards, or even just your need to get home quickly, prevent you from actually peering at the magician’s props and searching behind the curtain and under the stage – and, thus, prevent you from actually seeing the devices that enable the magician to make it appear to conjure rabbits out of thin air – you would not announce your agnosticism about whether or not rabbits are actually conjured out of thin air.  The fact that you haven’t at hand any empirical evidence of what is unseen doesn’t mean that a large chunk of a relevant ‘unseen’ doesn’t exist.

What is seen when trade restrictions are imposed are some specific jobs saved.  What is seen when minimum wages are imposed are some flesh-and-blood low-skilled workers being paid the minimum wage.  What is seen when government dictates that employers must offer some minimum number of days of paid leave is some employers offering, and some employees using, such leave.

“Wow!” exclaims a ‘Progressive.’  “I saw with my own eyes the politician protect some jobs from imports, cause low-skilled workers to be paid the minimum wage, and ensure that other workers get some stipulated amount of paid leave!  And also, the politician assures me that that’s what he did.  He wouldn’t lie to me.  So it must be true that the politician actually did these things – that he bends reality to his will.  I’m impressed!!”

The sensible person understands that the politician cannot do these things.  It’s a magic trick.  The politician makes it appear as if he or she works miracles by hiding from the credulous public, pundits, preachers, and professors the actual sources of the government-created apparitions.

What is hidden from the sight of the public when trade restraints are imposed are the resulting higher prices and lower qualities of consumer goods, as well as the jobs destroyed and not created as a result of the trade restraints.

What is hidden from the sight of the public when minimum wages are imposed are the workers who lose jobs because they are priced out of the market, the reduction in the hours – and the worsening of the employment conditions – of many workers who keep their jobs, and the artificiality of the heights of the incomes going to white teens from the suburbs and paid for, in effect, by unemployed teens from the inner city.

What is hidden from the sight of the public when government mandates paid leave are the jobs thereby destroyed, the jobs thereby never created, the lowering of base pay, and the worsening of other terms of employment.

And the gullible, dupable ‘Progressives’ and the public believe the magic to be real.  What a great gig for the politician-magicians.

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No politely sized blog post is large enough to contain even a tenth of all that that there is to say about cost-benefit analysis.  So in this post – which I’ll keep polite – I’ll make only one point.  (Well, I’ll make one point plus a preface.)

I preface my point by saying that I’m all in favor of cost-benefit analyses.  Enthusiastically so!  Indeed, it would be stupid to go through life indifferent to whether the prospective benefits of the actions we take exceed or fall short of the costs of those actions.  Because we humans have survived, I’m confident in concluding both that our ancestors were pretty good at cost-benefit analyses and that we, inheritors of our ancestors’ genes and mores, are also pretty good at cost-benefit analyses.

The question is not whether or not cost-benefit analyses should be performed.  Of course they should be performed.  The question is who should perform these analyses.  Because each individual adult (1) knows far more, than does anyone else, about his or her tastes and preferences, (2) knows more, than does anyone else, about the details of the opportunities and constraints that he or she confronts at each moment in time, and (3) has stronger incentives, than does anyone else, to take actions that yield the greatest total net benefits for him or her, the presumptively best location, in space and time, for doing cost-benefit analyses is the individual adult at each moment in time.

Of course multiple examples of the contrary can be offered, some of which are even empirically relevant.  But the strong presumption should be that each individual adult is in the best position to do what is for him or her appropriate cost-benefit analyses of available alternative courses of action.  (Note that the claim is not that each individual adult will always make decisions that turn out to be best for him or her.  Rather, it’s that each individual adult will make decisions for himself or herself that, as judged by him or her, generally turn out to be better than are decisions made for him or her by other people.)

So, yes, I’m all in favor of having human actions guided by reliable cost-benefit analyses.  This fact is why I favor decentralized actions within an institution of private property and contract law.  Decentralized actors, spending their own resources and personally standing to gain or lose from the choices they make, have strong incentives to make wise choices (as judged, of course, by each choosing individual rather than by officious third-parties).  That is, such individuals have strong incentives to conduct appropriate (that is, cost-justified!) cost-benefit analyses of their prospective courses of action.

Policies that forcibly remove decision-making authority from individual adults and place that authority in the hands of third-parties (whose actions are ultimately backed by threats of physical violence) of course, in some trivial way, should pass a cost-benefit test.  But advocates of such policies should recognize at least three things:

  • First, the amount of information and knowledge that third parties have about the costs and benefits that alternative courses of action have on other people for whom those third parties are making decisions is typically worse – less voluminous and less accurate – than is the amount of information and knowledge that each individual on the spot has about the costs and benefits that alternative course of action have for him or her.
  • Second, the incentive is great for third parties to substitute their own preferences for those of the individuals over whom these third parties have seized the power to make decisions.
  • Third, aggregate, or government-level, cost-benefit analyses substitute for that of individual-level cost-benefit analyses, resulting in less and less-reliable cost-benefit analyses.

In short, precisely because I think very highly of cost-benefit analyses, I want as much of them as possible to be performed and to be performed accurately.  This sincere desire is one reason why I favor free markets.

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In this short video, Johan Norberg dispels some myths about Mexican immigrants to the United States.

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