Here’s a letter to a now-former Cafe Hayek reader who is “sick and tired” of my “failure to support our President”:

Mr. Dave Foote

Mr. Foote:

Thanks for your e-mail.

Staunchly supporting Pres. Trump’s “Buy American, Hire American” program, you “reject [my] contention that production’s only purpose is to satisfy consumers.”  You believe that “production is … an end in itself.”

I disagree.  And evidence that I am correct and that you are mistaken is available from a simple mental experiment.  In a restaurant, you order a plate of scrambled eggs.  You are served instead, and charged a higher price for, beef wellington.  When you object, the waiter informs you that beef wellington requires more labor to produce, and that the chef gets greater satisfaction from producing beef wellington than from scrambling eggs.  The waiter concludes by declaring that ‘You are morally obliged to pay to support the chef’s production preferences.’

Do you agree with the waiter?  Are you obliged to pay for beef wellington while forgoing scrambled eggs?  If you answer ‘no,’ then you get my point.

But even if I’m mistaken – that is, even if production is indeed “an end in itself” – the case for protectionism remains rickety.  The reason is that protectionist policies protect only a subset of existing producers in the domestic economy.  These policies harm other existing producers (such as those who produce for export markets).  These policies harm also future producers – that is, those producers who would arise tomorrow but for the protectionism that keeps resources today artificially locked in protected firms.

So even if I grant, for sake of argument, your claim that production is an end itself, that claim does not justify protectionism, for protectionism artificially buoys the business of some producers only by artificially destroying that of other producers.

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

And in the above letter I don’t mention the foreign producers who are harmed by protectionist policies imposed on domestic consumers.

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Some Links

by Don Boudreaux on May 13, 2017

in Crime, Economics, Health, Reality Is Not Optional, Taxes

Here’s the concluding sentence of George Will’s most recent, and most excellent, column:

Those who would wall off cultures from “outsiders” are would-be wardens.

On the same topic, see also the always-wise Warren Meyer.

Jim Bovard sensibly wants to dethrone the F.B.I.

Jim Dorn calls on Trump not only to cut tax rates but also to cut government spending.

My colleague Pete Boettke reflects on the most recent meeting of the Mont Pelerin Society.

Richard Rahn explains that South Korea would have been even more economically dynamic and successful had its trade and economy been freer.

David Friedman goes into detail about his new project to teach economics.

Kevin Williamson is correct: there is no, and can be no, “right” to health care.  (HT Warren Smith)  A slice:

Here is a thought experiment: You have four children and three apples. You would like for everyone to have his own apple. You go to Congress, and you successfully persuade the House and the Senate to endorse a joint resolution declaring that everyone has a right to an apple of his own. A ticker-tape parade is held in your honor, and you share your story with Oprah, after which you are invited to address the United Nations, which passes the International Convention on the Rights of These Four Kids in Particular to an Individual Apple Each. You are visited by the souls of Mohandas Gandhi and Mother Teresa, who beam down approvingly from a joint Hindu-Catholic cloud in Heaven.

Question: How many apples do you have?

You have three apples, dummy. Three. You have four children. Each of those children has a congressionally endorsed, U.N.-approved, saint-ratified right to an apple of his own. But here’s the thing: You have three apples and four children. Nothing has changed.

Jeff Miron rightly criticizes Jeff Sessions’s escalation of the so-called “war on drugs.”  See also C.J. Ciaramella.

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… is from pages 34-35 of Juan Ramón Rallo’s informative essay – “Where are the ‘Super Rich’ of 1987?” – which is Chapter 3 of the new (2017) English-language translation of the volume of collected essays edited by Jean-Philippe Delsol, Nicolas Lecaussin, and Emmanuel Martin, Anti-Piketty:

imagesContrary to what many people imagine and what Thomas Piketty claims to show, it is not easy to conserve assets in a market economy.  Assets are at the mercy of changing consumer preferences, the emergence of new competitors, and the possible overvaluation (and ultimate collapse) of asset prices.  It is simply wrong to say that there is a threshold at which capital accumulation takes place at an almost automatic pace.

DBx: Powerful evidence against the proposition offered by people such as Thomas Piketty that the value of capital assets grows inexorably is the persistent pleas of owners of capital for state-supplied protection from the forces of competition.  Indeed, I wonder how many are the people who, with one breath, praise Piketty for pointing out the allegedly indisputable and dangerous truth that capital values grow inexorably, and then, with the next breath, join with the likes of Bernie Sanders, Chuck Schumer, and the AFL-CIO to insist that America will ‘deindustrialize’ and become impoverished if Uncle Sam doesn’t protect existing American companies from foreign competition.  (I see a Mark Perry Venn diagram here!)

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Bonus Quotation of the Day…

by Don Boudreaux on May 12, 2017

in Hubris and humility

… is from page 282 of the 1997 Johns Hopkins University Press edition of H.L. Mencken’s indispensable 1956 collection, Minority Report:

Unknown-3The truly civilized man is always skeptical and tolerant….  His culture is based on “I am not too sure.”

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Here’s a letter to the Washington Post:

Defending the Trump administration’s scheme to punitively tax Americans who buy lumber from Canada, Jimmy Carter confirms that his grasp of economics is just as feeble as is Donald Trump’s (“Trump is right. Canada’s lumber trade practices are unfair.” May 10).

First, Mr. Carter fails to understand that we Americans are enriched whenever the prices we pay for imports fall, whether these falling prices result from foreign-government subsidies or from improvements in foreign-producers’ methods of production.  The people made poorer by Canadian-government subsidies of Canadian lumber production are Canadians, not Americans.  And the people harmed by U.S. “retaliation” are Americans, not Canadians.

Even worse is Mr. Carter’s claim that “With moderate adjustments in management, there is enough timberland in the United States to supply the total American market with lumber.”  This statement reveals Mr. Carter’s appalling ignorance of that key economic consideration, cost.

The question here is not: Is America’s self-sufficiency in lumber physically possible?  (Of course such self-sufficiency is possible.)  Instead, the question is: Is America’s self-sufficiency in lumber cost-effective?  For America to be self-sufficient in lumber – or even just closer to self-sufficiency in lumber – requires greater use of American land, labor, and other resources to produce lumber.  An unavoidable consequence of increased lumber production in America is less American land, labor, and other resources available to produce wheat, tourism, aluminum, and other goods and services.

Therefore, government policies that artificially increase Americans’ production of lumber artificially decrease Americans’ production of other goods and services.  For these other goods and services, we are thus made less dependent on ourselves and more dependent upon foreign suppliers.  And we are made poorer.

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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Blast from the Past

by Don Boudreaux on May 12, 2017

in Balance of Payments, Trade

Rummaging through long-ago Cafe Hayek posts I came upon this one from December 18, 2005.  In it I quote from an e-mail sent to me back then by the economist Jack Wenders.  Here’s Jack, now unfortunately no longer with us, speaking to us from across the years about a topic – trade deficits – that continues to be a source of great confusion and much policy mischief:

If China buys lumber, concrete, steel, furniture, etc. from the US, it’s considered great. But if China buys exactly the same material embedded in a building within the US, it’s considered bad. Go figure.

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Here’s the next installment in George Selgin’s important primer on monetary policy.

Steve Horwitz explores the socialist catastrophe that is Venezuela.  A slice:

If you love the Scandinavian model, you don’t love socialism. You love market capitalism, because that’s what makes that model possible. (Whether large welfare states are necessary or desirable is a matter for another column.)

Allan Meltzer is remembered by Gerry O’Driscoll, by Jim Dorn, and by David Henderson.

Tim Worstall corrects Warren Buffett on the nature of capitalism.

Art Carden rightly admires F.A. Hayek.

David Harsanyi correctly takes Democrats to task over the hypocrisy they reveal in their understandable disgust at Trump’s use of presidential power.

Bob Higgs ponders the health-insurance quagmire.

My Mercatus Center colleague Dan Griswold exposes some of the many fallacies that fuel efforts to reduce America’s bilateral trade deficits.

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… is from page 6 of Jean-Philippe Delsol’s excellent essay – “The Great Process of Equalization Continues” – which is Chapter 1 of the new (2017) English-language translation of the volume of collected essays edited by Delsol, Nicolas Lecaussin, and Emmanuel Martin, Anti-Piketty:

Unknown-3Our view of human history is often biased by a historical effect of position, a kind of 21st-century glasses, undoubtedly amplified by the persistent myth of a precapitalist golden age, populated by cheerful people, eating their fill and living free, healthy, and long lives.  In reality, the daily life of an average person before the advent of capitalism was much crueler than even the images evoked by Balzac of the 19th-century industrial age, which have haunted our conscience since adolescence.

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Regular readers of this blog know that I believe claims of the meaningful existence of monopsony power in the market for low-skilled workers in America to be ludicrous on their face.  These regular readers also know that even if such widespread monopsony power did exist, it is only a necessary and not a sufficient condition for minimum wages not to reduce the employment prospects of some low-skilled workers.  For minimum wages to work as promised by those who assert that minimum wages will not destroy some jobs for low-skilled workers, the employers of low-skilled workers must posses both monopsony power over low-skilled workers and monopoly power in their output markets.  (See, for example, these observations by Jim Buchanan and Don Dewey.)

Warren Meyer has a beautiful and clear post today making the point more clearly and more forcefully than I have ever made it.

So let’s consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.  As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins (net income divided by revenues) — for comparison, last year Microsoft had a pre-tax net income margin of over 23%.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners invested in the business. The much more likely responses will be

  1. Raising prices to cover the increased costs. This approach may be viable competitively, as most competitors will be facing the same legislated cost pressures, but may not be acceptable to consumers

  2. Reducing employment. This may take the form of stealth price increases (e.g. reduction in service levels for the same price) or be due to a reduction in volumes caused by price increases. It may also be due to targeted technology investments, as increases in labor costs also increase the returns to capital equipment that substitutes for labor

  3. Exiting one or more businesses and laying everyone off. This may take the form of targeted exits from low-margin lines of business, or liquidation of the entire company if the business Is no longer viable with the higher labor costs.

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John McGinnis explains that Uber is a force for greater equality.

But the assault on Uber also ignores a hugely important effect of company and similar services: they reduce  inequality— which these same politicians and mainstream media argue is the most important issue of our time.  Uber improves both the material condition of the middle-class consumer and the lower-middle-class driver.  First, the consumer gets a service that starts looking more like having a chauffeur than a taxicab driver. For instance, he can summon a driver without previous notice and within minutes by pushing a button on his phone in the comfort of home rather than hail a taxi in a storm.And like those with chauffeurs he becomes less anxious about moving around even in unfamiliar cities.  Moreover, because of the ratings systems for drivers, he gains more confidence that the quality of the driver will approximate that of a chauffeur with whom he has a long-term relationship.

Drivers too benefit from Uber. The best evidence is that they generally make more money even after expenses than taxis drivers. How much more depends on the place they drive. But that is not their only advantage. A recent economics article has shown that their flexible work hours are worth an huge additional amount to them–about 150 dollars per week on average.

With help from the GMU Scalia law-school’s Ilya Somin, George Will exposes Trump’s lawlessness.

GMU Econ alum Mark Perry busts a myth trumpeted by the AFL-CIO.

Anton Howes does some interesting counterfactual economic history.  (HT Walter Grinder)

My great colleague Walter Williams asks: What do leftists celebrate?  And on a related topic, Art Carden reveals that among the many unfortunate legacies of Karl Marx is anti-intellectualism.

Richard McKenzie explains why Trump’s industrial policy will fail to improve the lives of ordinary Americans.

In this short video, Johan Norberg tells the happy news of recent and significant reductions in global poverty.  (See also this op-ed by Bjorn Lomborg.)

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