In this post, which is likely the wonkiest one that I’ve ever offered at Cafe Hayek, I address the following question, which is posed to me in an e-mail from one “Clango” but here worded by me: “Why won’t the rise in workers’ incomes caused by the imposition of a minimum wage create enough additional consumer demand to prevent unemployment of any low-skilled workers?”

An economist more skilled and insightful than I am would undoubtedly offer a shorter, clearer, and more precise analysis.  Nevertheless, if you’re interested in my answer and analysis, read below the fold.

Read the full post →

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Quotation of the Day…

by Don Boudreaux on June 19, 2016

in Myths and Fallacies, Other People's Money

… is from page 123 of the 2016 Third Edition of James D. Gwartney’s, Richard L. Stroup’s, Dwight R. Lee’s, Tawni H. Ferrarini’s, and Joseph P. Calhoun’s excellent Common Sense Economics:

The power to tax and regulate makes it possible for the majority to coerce the minority.  There is no such coercive power when resources are allocated by markets.  Market exchanges do not occur unless all parties agree.  Private firms can charge a high price, but they cannot force anyone to buy their product.  Indeed, private firms must provide benefits that exceed the price charged in order to attract customers.

Members of the modern clerisy (to borrow Deirdre McCloskey’s term) reveal their distorted vision of reality when (as they often do) they assert that the freedom to make voluntary exchanges with money is both evidence of, and fuel for, anti-social greed, and assert also that the use of force to prevent such exchanges – as well as to take from Smith in order to give to Jones – is both evidence of, and fuel for, loving and peaceful social cooperation uncorrupted by greed or even by self-interest.  In the gnarled eyes of the clerisy, the business person who earns lots of money by producing a product that many people voluntarily choose to purchase is a socially destructive, narrow-minded, and greedy parasite, while the politician who uses threats of violence to prevent people from dealing with this business person, or who uses threats of violence to seize a large chunk of this business-person’s earnings, is a socially creative, broad-minded, and charitable benefactor.

In short, when sellers peacefully request, and buyers voluntarily agree to give, money in exchange for goods and services, the clerisy declare that what occurs is unsavory and destructive human devilment.  But when politicians forcibly demand, and their victims – in order to save their skins – obey, the clerisy proclaim that what occurs is lovely, altruistic, and creative human brotherhood.

It’s damned bizarre.

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… is from pages 175-176 of historian Arthur Ekirch’s important (if flawed in some, tho’ by no means all, of its economics) 1974 volume, Progressivism in America (link added):

Between the war with Spain and the first world war, a radical transformation took place in both American foreign and domestic policy.  Expansion abroad, like reform at home, became a means of rationalizing the economy.  As William Leuchtenburg has pointed out, Progressivism and imperialism flourished together, not as opposites, but as “expressions of the same philosophy of government, a tendency to judge any action not by the means employed but by the results achieved, a worship of definitive action for action’s sake . . . .”

A note: The naive mind, upon reading the above quotation, might ask ‘Isn’t it good to judge any action by the results achieved rather than by the means employed?’  The wise mind replies ‘No; not in matters of public policy.  Each government action unleashes a small set of more or less discernible consequences, both favorable and favorable.  But each government action also unleashes a much larger set of indiscernible consequences – also both favorable and unfavorable.  These indiscernible consequences ripple out over space and time in ways that are practically impossible to trace in detail and with confidence.  Each policy interacts over space and time with an ever-expanding complex of other social and economic forces, including other government policies, and thus helps to change society in ways that are impossible to detect in detail, and much less to quantify.

‘Therefore,’ continues the wise mind, ‘the best guides to public policy are the means and not the consequences.  If the means are ones that we consistently reject in our private lives because we recognize them, from long human experience, to be unjust and dangerous – such as using force to change the actions of non-aggressive persons who do not actually and individually agree to be subject under the circumstances to such force – a powerful presumption ought to operate against allowing the collection of people known as “the state” to use those means.  In matters of state action, we can assess the appropriateness of means far more reliably than we can assess the seen and unseen consequences.  This truth, of course, applies to both domestic and foreign policies.’

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Some Links

by Don Boudreaux on June 18, 2016

in Crony Capitalism, Growth, Podcast, Regulation, Seen and Unseen, Video, Work

GMU Econ alum Liya Palagashvili last night made her debut appearance on national television – on Stossel – to help explain some of the ill-consequences that will be unleashed by the Obama administration’s new overtime-pay diktat.

David Boaz reminds us of a new made-for-TV documentary on the benefits of economic freedom.  (My good friend Richard Rahn is both featured in these programs and is instrumental in making them a reality.)

The New York Times reports on the explosive growth of occupational-licensing restrictions over the past few decades – and on the coalition, featuring the superb work of the Institute for Justice, to free workers (and consumers) from the cruel clutch of monopolists.  A slice:

Economists on both the left and the right argue that excessive licensing raises prices for consumers without improving services; it can also deter potential workers from moving across state lines, dragging down employment growth.

“There is no labor economist who thinks it is good for the economy,” said Lee U. McGrath, legislative counsel in Minnesota for the Institute for Justice, a libertarian organization whose lawyers are representing Ms. Granatelli in a lawsuit against the Arizona veterinary board.

(Question: How vocal has Paul Krugman been in exposing the inefficiencies, cronyism, and injustice of occupational licensing?  I don’t recall seeing much by Mr. Krugman on this topic, although perhaps he’s spilled much ink opposing this species of monopolization and I’ve missed it.)

Thanks to FEE, and FEE President Larry Reed, for making widely available this splendid 1917 speech by George Sutherland, who a few years later became an Associate Justice on the U.S. Supreme Court.  A slice from Sutherland’s speech:

The trouble with much of our legislation is that the legislator has mistaken emotion for wisdom, impulse for knowledge, and good intention for sound judgment. “He means well” is a sweet and wholesome thing in the field of ethics. It may be of small consequence, or of no consequence at all, in the domain of law. “He means well” may save the legislator from the afflictions of an accusing conscience, but it does not protect the community from the affliction of mischievous and meddlesome statutes.

Bret Swanson explains the errors of the recent court ruling that allows the FCC to treat the internet as a public utility.  Let us hope that this ruling is overturned on appeal.

John Hasnas’s theory of why politicians routinely lie makes perfect sense.

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No Witz About Trade

by Don Boudreaux on June 17, 2016

in Balance of Payments, Myths and Fallacies, Trade

On my Facebook page Scot Wick quoted a passage from a new book by the modern-day mercantilist Clyde Prestowitz – who, being a mercantilist, understands neither trade in general nor matters concerning the trade deficit in particular.  (I do not believe that Scot agrees with Prestowitz.)  Here’s part of the Prestowitz passage quoted (from page 2 of Prestowitz’s book) by Scot Wick on Facebook:

It is easy [for the free traders, who Prestowitz opposes] to downplay the significance of the U.S.-China trade imbalance, as well as the startling difference in the nature of what we import [computer equipment] and what we export [scrap]….

The words in brackets are added by Scot Wick, but a quick Google Books check reveals that Prestowitz does indeed complain about the U.S. exporting scrap and importing computer equipment – although on Prestowitz’s account U.S. scrap is exported to Asian countries in addition to China, and computer equipment is imported from Asian countries in addition to China.  Here’s a quotation from pages 1-2 of Prestowitz’s book:

Even more striking than the size of the port and the armada of ships is the contrast between the cargo that’s off-loaded and that being loaded for the return trip to Osaka, Busan, Shanghai, Hong Kong, and Singapore.  The imports are as numerous as the sands on the nearby beach, including everything from shoes and shirts to computers, autos, advanced telecommunication gear, and photo voltaic panels for generating solar energy.  The exports, though, are few, consisting mostly of scrap metal and waste paper – this millennium’s dung, you might say.

In 2008, our scrap metal and waste exports to China alone totaled $7.6 billion, exceeding our exports of each of the next three strongest categories: semiconductors, aircraft and parts, and oilseeds and grains.  And even with all of those and other exports included, the U.S. trade deficit with China runs annually at about $250 billion….

A sure sign of failure to adequately understand trade in full is to worry that country X is necessarily harmed by running trade deficits with the rest of the world.  A sure sign of failure to understand anything at all, including the first principles, about trade is to worry about country X’s “trade imbalance” with country Y.  As pointed out often here at Cafe Hayek, even if – contrary to fact – a U.S. trade deficit with the rest of the world is economically harmful to Americans, a U.S. trade deficit with any one or more of a subset of the world’s other countries is not harmful.  Nothing at all in economic theory, or even in common sense, suggests that, in a world of more than two countries, the amount that country X imports from country Y will or should equal the amount that country X exports to country Y.

Quite frankly, the moment anyone – regardless of degree, pedigree, profession, position, or prize-holdings – starts talking about bilateral trade “imbalances” in a world of more than two countries, that person deserves no further attention.  He or she either doesn’t know what he or she is talking about or he or she is being intentionally deceptive.  There is no other alternative.  Having no cause to suppose that Mr. Prestowitz is anything but honest and sincere, I conclude that he is simply, and deeply, ignorant about trade.

No further evidence of Mr. Prestowitz’s ignorance about trade is required to establish that ignorance as a presumptive reality.  But other evidence of such ignorance is readily available.

Consider his allegation that it’s somehow bad to export scrap and get in return valuable goods.  Prestowitz writes as if non-Americans willingly accept worthless crap – “dung” – from Americans in exchange for valuable goods.  If only it were so!  I’d love for Sony or Toyota or Starbucks or Ikea to agree to give me some of the items they market in exchange for mere dung (or whatever other junk I might dig up from somewhere).

The fact that Prestowitz thinks that the party who gives up valuable goods in exchange for dung is ‘winning’ at trade while the party who receives valuable goods and pays for these goods with mere dung is ‘losing’ at trade tells you all you need to know about Prestowitz’s grasp of economics.

But, of course, the scrap and waste that the U.S. exports is not, contrary to Prestowitz’s obvious implication, valueless or (what is the same thing) cheap stuff widely available almost anywhere on earth for the taking.  We know that it’s not valueless because strangers abroad willingly send us valuable goods in exchange for this scrap and waste.

Prestowitz likely is confused by the fact that, because some products are the by-products of production processes that take place in America (for example, the scrap metal that I know from first-hand experience is generated when Americans build ships) – and because non-Americans have a comparative advantage at converting these by-products into valuable goods and services – that American exports of scrap are without much value.  But he’s mistaken.  (Remember the old joke about what weighs more: a pound of lead or a pound of feathers?  The lesson of that joke applies here.)

…..

Clyde Prestowitz is a prolific mercantilist – which means that he’s a prolific source of confusion and misunderstanding about economics generally and about trade in particular.

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In 1984 economist David Glasner wrote an essay for the New York Times entitled “The Much Maligned Trade Gap.”  (I can’t tell if this essay was actually published in the NYT.)  Anyway, whether it was actually published or not 32 years ago is irrelevant: it’s excellent and deserves today a wide readership.

Earlier this month, Glasner reproduced this 1984 essay of his at his blog, Uneasy Money.  Here, below, is that that essay in full (but do click on Glasner’s blog post to read also his updated commentary):

The Much Maligned Trade Gap

No economic statistic is reported more dolefully these days than the country’s trade balance.

Ever on the alert for signs of impending economic disaster, the press routinely couples reports of record monthly trade deficits with warnings of experts and Government officials of the dangers of the deficit.

Just what is so dangerous about receiving more goods from foreigners than we give them back is never actually explained, but it is often suggested that that it causes a loss of American jobs.

News reports sometimes even provide estimates of the number of jobs lost owing to every billion dollar increase in the trade deficit. Heaven only knows how these estimates are made, but presumably they are based on the assumption that imports deprive Americans of jobs they could have had producing domestic substitutes for the imports.

It almost seems tedious to do so, but it apparently still needs to be pointed out that buying less from foreigners means that they will buy less from us for the simple reason that they will have fewer dollars with which to purchase our products.

Thus, even if reducing imports increases employment in industries that compete with imports, it must also reduce employment in export industries.

Moreover, the notion that the trade deficit destroys domestic jobs is contradicted by the tendency of the deficit to increase during economic expansions and to decrease during contractions.

The demand for imports rises with income, so imports normally tend to rise faster than exports when a country expands more rapidly than its trading partners. The trade deficit is a symptom or rising employment — not the cause of rising unemployment.

That balance-of-trade figures are misunderstood and misused is not surprising, since their function has never been to inform or to enlighten. Their real purpose is to provide spurious statistical and pseudo-scientific support to groups seeking protectionist legislation. These groups try to cloak their appeals to protection with an invocation of the general interest in a favorable balance of trade.

Anyone who has ever thought about it has probably wondered why a country that gives up more goods in trade than it gets back is said to have a favorable balance of trade.

If you have ever wondered about it and couldn’t think of an answer, don’t worry, because you are in good company. Adam Smith couldn’t either. “Nothing,” Smith once observed, “can be more absurd than this whole doctrine of the balance of trade, upon which . . . almost all the . . . regulations of commerce are founded.”

The absurdity of the doctrine ought now to be manifest owing to the current international debt crisis. The crisis, as we all know, arose because large numbers of developing countries are apparently unable to make the scheduled payment on loans to American banks from which they borrowed.

It is, I believe, just about universally acknowledged that it would be a bad thing if the debtor countries failed to repay their loans.

The debtor countries would suffer because they would be less able to borrow in the future, and thus less able to import the products they need to take care of their populations and to promote development.

Creditor countries would also suffer because default would impose huge losses on the banks and their shareholders. And since such losses might undermine the domestic and international banking systems, they would undoubtedly be made up, at least in part, by the Government and the taxpayers.

Yet it is remarkable how little, even now, the relationship between the ability of the debtor countries to repay their debts and the size of the American trade deficit is understood. For everyone continues to rail against the trade deficit even though reducing it would make the default of the debtor countries all the more likely.

A simple example will help to explain why that is so.

Suppose I borrow money from you and promise to repay you next year. And, for simplicity, suppose that neither of us engages in transactions with third parties. Thus, I produce goods, some of which I consume myself and the rest of which I sell to you, and you produce goods, some of which you consumer and the rest of which you sell to me.

Now the reason that I am borrowing from you is that the value of the goods I want from you this year exceeds the value of what I am willing to sell you this year. But next year I shall have to sell you enough not only to cover what I buy from you, I shall have to sell you enough to earn the money with which to repay you.

Thus, to avoid default, I must run a trade surplus with you next year. And if you want to be repaid, you have to reconcile yourself to the idea of running a trade deficit, because repayment consists in, and is equivalent to, my trade surplus and your trade deficit.

The debtor nations are faced with default because they haven’t enough dollars to repay the banks from whom they have borrowed. Why not? Because their trade surplus with the United States — our trade deficit with them — is too small for them to earn the dollars they need for repayment.

How could they earn more dollars? 1. They could reduce their imports from us. 2. They could increase their exports to us. 3. They could borrow more dollars from us. 4. We could give them the dollars.

The first two options both imply an increase in our trade deficit. That sounds bad only if you ignore the alternatives. The third option might have some attraction if the debtor countries could repay their existing debts. But since they can’t even do that, further lending seems inadvisable.

The fourth option, it goes without saying, is the economic equivalent of default.

Those who insist that the United States trade deficit must be reduced had better think through the implications. They should ask themselves whether they really want to drive the debtor countries to the wall and whether they are prepared to absorb the losses associated with a default by the debtor countries just to stop American consumers from buying as much of the products of debtor countries as they want.

Allowing unrestricted access of those products into our markets would not necessarily prevent default, but maintaining or tightening restrictions can only increase the likelihood and the severity of an eventual default.

And at a more fundamental level, isn’t there something perverse in first lending to someone, and then, after having refused to accept payment, hauling him into court because he won’t pay his debts?

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Doux Commerce, avec Sourires

by Don Boudreaux on June 17, 2016

in Civil Society

The first five or so minutes of an NPR “Morning Edition” broadcast this morning sounds as though it is the product of Reason TV.  It is a clip from the NPR series “Invisibilia.”  (Go here and then scroll down to “Invisibilia Season 2.”  Then hit the accompanying “Listen” button.)

In this clip, McDonald’s is positively portrayed as being an excellent, almost heroic, force for good.  McDonald’s manner of doing business is celebrated as changing social norms for the better – for making the world (or at least Russia) not only a more consumer-friendly place, but also a more pleasant, a more polite, a more respectful, and a (yes) more happy place.

Listeners are reminded at the start of the clip that Americans smile a lot, including at strangers.  Russians – and, especially, Russians under Soviet domination – did not smile very much.  Then McDonald’s opened in Moscow in 1990.  McDonald’s trains its workers to smile at customers, and to be polite and friendly.  We then learn – from one of the Russians who worked at that McDonald’s in Moscow – that that restaurant became a place of pleasant refuge for Muscovites.  The simple, smiling friendliness and politeness that Americans take for granted was, in Russia, actively sought after by many Russians and embraced by their choosing to dine at McDonald’s.

Commerce – voluntary exchange – is essential for what Deirdre McCloskey calls “market-tested betterment.”  This betterment, however – and Deirdre would agree – is manifested not only in new and better material products but also in the ways in which businesses treat consumers.  In market economies consumers are valuable to businesses; in these economies consumers are treated by businesses as respected guests.  In contrast, in non-market economies – in economies in which prices and profits are prevented from moving in market-clearing directions – consumers are treated by ‘businesses’ as repellant pests.

Even the last, short part of the “Morning Edition” segment of “Invisibilia” – the part that does not sound as though it was produced by Reason TV –  sings, albeit unintentionally, the praises of markets: businesses are so intent on pleasing their customers that they demand that workers who interact with customers bend over backwards to please even difficult customers.

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Quotation of the Day…

by Don Boudreaux on June 17, 2016

in Reality Is Not Optional

… is from page 145 of the final volume (2016) – Bourgeois Equality – of Deirdre McCloskey’s pioneering trilogy on the essence and role of bourgeois values in modern life:

The relevant comparison is not of some unattainable utopia of perfect trade-tested betterment with actual, imperfect government regulation.  It is the comparison of the actual record of liberated trade, and the betterment it has brought to the powerless of the world, the the actual record of populism, fascism, socialism, and thick regulation bettering a few favored groups of the poor, every Party official, and most of the owners of the bigger enterprises able to corrupt the government, all at the expense of the rest.

Indeed.

My colleague Dan Klein once made a very quotable and very insightful remark – one that I cannot now find or recall in detail – that was brought to mind as I read the above passage from Deirdre’s latest book.  The essence of Dan’s remark, if not its poetic succinctness and balance, is the following: People rush to replace real-world markets upon the first sign of those markets failing to operate with textbook perfection, but are willing to forgive and to tolerate egregious failures of government to perform in textbook-perfect ways.

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Some Links

by Don Boudreaux on June 16, 2016

in Health, Monetary Policy, Myths and Fallacies, Seen and Unseen, Trade, Video

Bob Higgs reflects on comparative advantage.  A slice:

In the real world, of course, the complexity of trade defies comprehension, as countless millions of goods and services are produced, exported, and imported seemingly in defiance of any clear pattern. Yet, an underlying pattern is there, and it remains basically the same one described in its essence by Ricardo two hundred years ago.

Sally Satel wonders why the state makes getting medications so difficult.

Generous welfare states, such as those in the Nordic countries, promote greater gender equality in the workplace, right?  Absolutely dead wrong!, explains Johan Norberg in this short video.

The great Shikha Dalmia offers some advice to Gary Johnson.

Sarah Skwire riffs on Jane Austen.

Jerry Jordan ponders low interest rates and demographics.

Ilya Somin wisely warns against hastily made policies.

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Here’s a letter to the editor of PoliZette:

Alan Tonelson’s insistence that America’s trade deficit is a drag on economic growth is itself a drag on economic understanding (“You Bet America’s Trade Deficits Matter,” June 15).  To put it bluntly, Mr. Tonelson doesn’t know what he’s talking about.

Consider his assertion that “mainstream economics has long held that when a nation’s trade balance worsens, its economic growth slows.”  First, no less an economist than Adam Smith demonstrated in 1776 that worries about a nation’s ‘balance of trade’ are foolish.  Smith concluded that “Nothing, however, can be more absurd than this whole doctrine of the balance of trade.”*

Second, apart from alluding to a connection between recent U.S. trade deficits and the slow recovery from the Great Recession, Mr. Tonelson offers no evidence that trade deficits dampen economic growth – perhaps because no such evidence exists.  For example, as my Mercatus Center colleague Dan Griswold documented in a 2011 study, “since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting.”  (Also, Mr. Tonelson’s assertion is difficult to square with the fact that for nearly all – in 102 of the 120 months – of the Greatly Depressed 1930s America ran trade surpluses.)

The likely explanation for Mr. Tonelson’s confusion is that he realizes neither that a significant portion of American imports are inputs used to boost production in America (including manufacturing) nor that a rising trade deficit means more foreign investment – more capital – flowing into America.  In practice, these inflows of capital signal that investors are optimistic about the future of the U.S. economy as well as themselves serve as sources of job creation and economic growth in the U.S.

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

* This quotation appears in An Inquiry Into the Nature and Causes of the Wealth of Nations, Book IV, Chapter 3, Part II, paragraph 31.

(HT Steve Conover for alerting me to Tonelson’s article.)

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