… is from page 486 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Despite offsetting economic gains [from free trade] that typically far outweigh the losses, politically it is almost inevitable that there will be loud calls for government protection from foreign competition through various restrictions against imports.  Many of the most long-lived fallacies in economics have grown out of attempts to justify these international trade restrictions.  Although Adam Smith refuted most of these fallacies more than two centuries ago, as far as economists are concerned, such fallacies remain politically alive and potent today.

Protectionism remains a threat because the enormous rents captured by protected domestic producers are easy to see and easy to be mis-portrayed – today by the likes of Pat Buchanan, Lindsey Graham, William Greider, Peter Morici, and others who are poorly informed economically – as benefits to society rather than as the costs that they are.

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Discourses On Trade

by Don Boudreaux on September 26, 2015

in Trade

An acquaintance recently wrote the following to me by e-mail:

I was asked if it would be in the interest of the US that we lease a large tract of land to a foreign gov’t, allow them to bring in workers, build manufacturing plants, exempt them from US labor, environmental and other regulations  and task them to build labor intensive products. It could be cars, barges, tractors, whatever. It would be understood that domestic industry would suffer or even ruined but the prices would be lower. Perhaps even lower than if the product were made in China (or wherever) as transportation costs are eliminated.

If this is to the advantage of the US, why not propose it. If it is not to the advantage of the US, what is different in concept between this and the free trade agreement w Korea? I wasn’t sure that my answer was satisfactory. So, I thought that I would ask you.

The proposal of a hypothetical special economic zone within the U.S. is a red herring (although I will likely, in a follow-up post, say more about it).  What’s really being asked is why should Uncle Sam permit Americans to trade freely with non-Americans who – because these non-Americans’ costs of production are supposedly lower than are the costs of their American competitors (due to the non-Americans’ exemption U.S. regulations) – can underprice American producers.

Although straightforward, there are many layers to this question.  By “many layers” I do not mean that the answer to the question is ambiguous; it isn’t.  The answer (as I will explain) is unambiguously that Uncle Sam will make Americans as a group poorer by restricting Americans’ freedom to spend their money on these foreign products.  But explaining just why this answer is unambiguously correct can, and should, be done at different levels of economic sophistication.  I will do each ‘level’ in different posts.  In this post I do level one. Read the full post →

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Mark Perry exposes the imaginary hobgoblin of rising income inequality.

In today’s Wall Street Journal, Andy Koenig reviews some of the bloated-with-bigotry (and with rents) history of the Davis-Bacon Act.  (gated)  A slice:

Davis-Bacon has one of the most despicable back stories of any law on the federal books. When it passed in 1931, organized labor was upset that contractors were ignoring its members in favor of more affordable employees, especially minorities.

William Green, then president of the American Federation of Labor—half of the modern AFL-CIO—testified before Congress that “colored labor is being brought in to demoralize wage rates.” New York Rep. Robert Bacon, one of the act’s sponsors, was incensed at an Alabama contractor employing African-Americans to build a hospital in his district.

Despite this disturbing history, Davis-Bacon is still beloved by unions and their allies in Congress. No wonder: It mandates that private contractors pay “prevailing wages”—typically the union wage in any given area—on all federal construction projects that cost more than $2,000.

Ian Vásquez offers a graph for Pope Francis – and for those who are impressed by Pope Francis’s economic analysis – to ponder.

The Swede Anders Ingemarson isn’t buying Bernie Sanders’s case that Sweden is a good role model for the U.S. to (attempt to) mimic.  (HT George Leef)  A slice:

Sweden is a relatively wealthy country despite being a welfare state, not because of it.

Chris Edwards shows that Congress’s behavior is very well explained by public-choice theory.

The Free Market Institute’s Ben Powell (GMU Econ PhD, 2003) explains why Donald Trump is wrong about immigration.  (HT Bob Murphy)

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Quotation of the Day…

by Don Boudreaux on September 25, 2015

in Complexity & Emergence, Hayek, Prices, Seen and Unseen

… is from page 144 of F.A. Hayek’s 1941 Liberal Review essay, “The Economics of Planning,” as reprinted as chapter four of the 1997 collection, edited by Bruce Caldwell, Socialism and War:

That man did develop the modern industrial apparatus is due to the fact that he stumbled through a slow and gradual process of trial and error on a method which combined decentralization and coordination, a method under which nobody needs to know all the facts which a planner would have to know, and where the most essential information required for a particular decision is conveyed to those who have to make it speedily and simply by an automatic process.  I mean the competitive markets and the price system.

It’s important to understand a reality that many modern economists have either never learned or have forgotten: market prices need not be ‘perfect’ or ‘equilibrium’ to perform the essential task of prompting individuals to act as if they possess an amount of detailed knowledge that, in fact, they do not (and could not possibly) possess.

For example, an improvement in fracking technology increases the supply of petroleum.  To sell more of their product, therefore, oil companies lower the prices they charge for crude; as a further result, crude-oil refiners purchase more crude oil and, as yet another further result, transform more crude into refined gasoline.  In order to sell this greater supply of gasoline, refiners lower the prices they charge to gasoline retailers who, in turn, lower the prices they charge to consumers.  All along the way, individuals – as producers and and as consumers – respond to the improvement in fracking technology as if they are all aware of its reality and of the fact that this technology improvement makes petroleum less precious than petroleum was before this improvement.

At no stage in this process need prices be ‘perfect,’ ‘perfectly competitive,’ or at levels that economists would describe as ‘general equilibrium.’  Instead, the prices need only prompt individuals all along the way to act as if they are aware of the nature of the economic change (in this example, the increased supply of petroleum created by the improvement in fracking technology).  Only that which we might call “directional correctness” – that is, prices prompting countless individuals to adjust their actions in the proper direction so that their actions better conform with underlying realities – is required for prices to perform their vital task of bringing the economic decisions of myriad strangers into fuller coordination with each other and with physical realities.  (Note that I say “fuller coordination.”  Coordination that is more full is superior to coordination that is less full.  And so we should celebrate coordination that is as full as is practically possible.  In a world of imperfect human beings and of constant change, it’s pointless, or absurdly scholastic, to lament the lack of perfect, or completely full, coordination and to attach the label “imperfect” to a process that brings about more coordination among millions of individuals than could possibly be achieved by any other means.)

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Here’s the video of Texas A&M economist Jonathan Meer’s recent debate with University of Texas economist James Galbraith on the minimum wage.  (HT Bryan Caplan)

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Quotation of the Day…

by Don Boudreaux on September 24, 2015

in Environment, Myths and Fallacies, Property Rights

… is from pages 327-328 P.J. Hill’s Fall 1992 Cato Journal article, “Environmental Problems Under Socialism“:

Private [property] rights are also a way of ensuring that those who control resources take account of the effect of present actions on future resource values.  Since the price of a resource reflects the capitalized value of the future income stream from that resource the decision makers have every reason to take account of future effects of their actions.

However, under a system of central planning and state ownership, it is much more likely that the resource manager will be short-sighted.  The lack of property rights means the decision makers are not penalized through decreases in the asset value when they ignore future consequences of their actions.

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Some Links

by Don Boudreaux on September 24, 2015

in Charity, Crony Capitalism, Economics, Other People's Money, Subsidies, Video

David Henderson highlights Steve Landsburg’s recollection of valuable lessons learned from the great Deirdre McCloskey.

I do not often praise speeches delivered by government officials, but I praise this one sincerely: it’s by Federal Trade Commission commissioner Maureen Ohlhausen.  (HT Adam Thierer)  I boast that Ms. Ohlhausen is a 1991 graduate of the George Mason University School of Law.

Tim Carney exposes the foolishness that runs throughout James Fallows’s defense of that great geyser of cronyism, the U.S. Export-Import Bank.  (I just wish that Tim would stop calling people such as Fallows “liberal.”  Fallows isn’t liberal in the correct meaning of that term; he’s statist.)

More than just foolishness is unleashed in defense of government’s mercantilist habit of raiding other-people’s resources in order to enhance the profits of large exporting corporations.  Another tactic used by cronyists (as my intrepid Mercatus Center colleague Veronique de Rugy explains) is bullying.

On Tuesday I discussed, with Brad Jackson, the morality of capitalism on the show “Markets and Coffee.”  (The background, of course, is Pope Francis’s visit to the U.S. and his criticisms of capitalism.)

One of my favorite philosophers is Matt Zwolinski.  You’ll see why in this new Learn Liberty video.

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The Economics of the Vatican

by Don Boudreaux on September 23, 2015

in Trade

I like this e-mail that I received this morning from Rick Monihan.  (I share it here, in full, with his kind permission.)

In light of your recent articles about the Pope, few of them complimentary regarding his economic or political views, perhaps a positive learning experience about the Vatican might be in order?

It occurred to me that the Vatican is a nation.  It has no agriculture, no manufacturing and imports far more than it exports.  Its primary source of income is tourism and the sale of goods at the Vatican Museum.

Yet it’s a remarkably successful nation, and quite wealthy.  The fact it imports more [physical goods] than it exports has not drained that wealth.  It seems to me that people who point to a “need” for agriculture and/or manufacturing, or even exports exceeding imports, miss a much larger picture, and the Vatican might be a good example to disprove many of these myths.

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Thomas Sowell is unimpressed with Pope Francis’s economic and political commentary.  (HT W.E. Heasley)  A slice:

Pope Francis’ own native Argentina was once among the leading economies of the world, before it was ruined by the kind of ideological notions he is now promoting around the world.

In 1900, only 3 percent of American homes had electric lights but more than 99 percent had them before the end of the century. Infant mortality rates were 165 per thousand in 1900 and 7 per thousand by 1997. By 2001, most Americans living below the official poverty line had central air conditioning, a motor vehicle, cable television with multiple TV sets and other amenities.

A scholar specializing in the study of Latin America said that the official poverty level in the United States is the upper middle class in Mexico. The much criticized market economy of the United States has done far more for the poor than the ideology of the left.

Wall Street Journal columnist William McGurn is among those who, like Sowell, believe the pope to be peddling poisonous policy advice.  (gated)  A slice:

But this pope’s assault on the global economy suggests he believes the whole idea fundamentally disordered, leading to a world where competition is exalted over cooperation and people grow rich by exploiting the poor.

Only one problem. Even the most cursory look at the world confirms the opposite: The more fetters imposed on competitive markets, the harder life gets for those stuck at the bottom.

In fact, the poor fare much better in places such as Hong Kong, Taiwan or Korea, where markets and competition are relatively open, than they do in Latin America or Africa, where competition is far more limited. To put it another way, it isn’t global competition that makes nations poor but their isolation from it.

In my latest column in the Pittsburgh Tribune-Review, I highlight some of the reasons why I refuse to vote in political elections – and I explain that this fact does not mean that I’m politically voiceless.

James Pethokoukis weighs in on the zombie-like myth of middle-class economic stagnation in America.

David Hart reassesses the contributions of Frederic Bastiat to economic theory.

Tyler Cowen points us to an important new study, by scholars of unquestioned objectivity, of Obamacare.  Here’s the abstract (emphasis added):

This paper estimates the change in net (of subsidy) financial burden (“the price of responsibility”) and in welfare that would be experienced by a large nationally representative sample of the “non-poor” uninsured if they were to purchase Silver or Bronze plans on the ACA exchanges. The sample is the set of full-year uninsured persons represented in the Current Population Survey for the pre-ACA period with incomes above 138 percent of the federal poverty level. The estimated change in financial burden compares out-of-pocket payments by income stratum in the pre-ACA period with the sum of premiums (net of subsidy) and expected cost sharing (net of subsidy) for benchmark Silver and Bronze plans, under various assumptions about the extent of increased spending associated with obtaining coverage. In addition to changes in the financial burden, our welfare estimates incorporate the value of additional care consumed and the change in risk premiums for changes in exposure to out-of-pocket payments associated with coverage, under various assumptions about risk aversion. We find that the average financial burden will increase for all income levels once insured. Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden, depending on assumptions about risk aversion and the value of additional consumption of medical care. However, even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare; indicating a positive “price of responsibility” for complying with the individual mandate. The percentage of the sample with estimated welfare increases is close to matching observed take-up rates by the previously uninsured in the exchanges.

My GMU Econ colleague Dan Klein reviews Charles C. W. Cooke’s The Conservative Manifesto.

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Quotation of the Day…

by Don Boudreaux on September 23, 2015

in Politics

… is from page 15 of the late Ronald Max Hartwell’s “Introduction” to the 1979 Liberty Fund collection The Politicization of Society (Kenneth S. Templeton, Jr., ed.) (footnote excluded; link added):

Politicization thus takes the manifest form of increasing the power of the state, of increasing political power as against all other forms of power in society, of increasing the power of the politicians and the bureaucrats as against the power of individuals, private institutions, and voluntary associations.  For the individual this has meant increasing political ineffectiveness and frustration.  “Until August 1914,” A.J. P. Taylor has reminded us of England, “a sensible law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman.”  Today the individual Englishman is constantly aware of the state, over which he can exercise little or no control even though it makes more and more decisions about his life.  Individual political activity, in consequence, now combines a general sense of powerlessness with a desperate sense of party allegiance, for parties represent power, and party allegiance is compounded of self-interest and artificially generated conviction.  Passion becomes a substitute for power.

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