Some Links

by Don Boudreaux on January 13, 2017

in Books, Crony Capitalism, Stimulus, Taxes, Trade

Tom Woods graciously invited me back to be a guest on his radio show.  This episode was taped last Friday and aired on Monday.  In it, Tom and I discuss four of my book reviews that appeared in Barron’s.

My Mercatus Center colleague Scott Sumner has some probing questions about the G.O.P.’s “border-adjustable-tax” proposal.

Speaking of this “border-adjustable-tax” proposal, Stan Verger (much like Scott) predicts that, if it is enacted, it do great damage to the education, real-estate, and hospitality industries in the United States.

Do you know who Doris Leuthard is?

My Mercatus Center colleagues Veronique de Rugy and Matt Mitchell ask if more infrastructure spending will “stimulate” the U.S. economy in 2017?

GMU Econ doctoral candidate Jon Murphy explains why Trump’s tariffs won’t make America great again.

Walter Olson rightly applauds judges who resist presidential power grabs.

Tim Carney exposes Trump’s nominee for Commerce Secretary, Wilbur Ross, as the crony capitalist that he is.  (HT Jesse Walker)

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A Challenge (Or, Crowd-Sourcing)

by Don Boudreaux on January 12, 2017

in Trade

My friend Tom Palmer sent to me today this study done by the Coalition for a Prosperous America.  It seems to be authored by one Jeff Ferry, and its bottom line is that, at least in recent years, every $1 billion increase in goods imports into America causes a loss of 4,552 American jobs.  Pretty scary stuff, we are to conclude.

Recovering as I am from recent surgery, I have more time to waste than usual, so I spent a couple of hours today trying to make sense of this study.  It contains some glaring errors – such as when its author writes that

In general, imports are a straight substitute for domestic production. For example, for each dollar spent on a vehicle or a computer produced (or partially produced) in a foreign country, there is a domestic alternative.

Both common sense and economic theory tell us that this assertion is mistaken.  The global economy features distinct patterns of specialization, and these patterns aren’t random: people in each country specialize in those production activities for which they have a comparative advantage.  Countries with people who have a comparative advantage at producing lumber tend to export lumber and not import lumber.  These ‘lumber’ countries import non-lumber goods and services that the people there cannot produce at a comparative advantage.

Of course, these patterns of specialization and trade are never perfect – that is, these patterns are never in perfect equilibrium.  And even if they were today in perfect equilibrium, not only would this ‘perfect’ pattern change over time, there would at any moment in time still be a great deal of overlap between the comparative advantages of people in country A with those of people in some other countries, such that producers of (say) lumber in country X will find it profitable to export to country Y while producers of lumber in country Y will find it profitable to export to country X.  Nevertheless, it’s plainly mistaken to assume (as the author of this study seems to assume) that all goods and services, or even most goods and services, that Americans import compete directly with currently on-going American production.

(For a more detailed and elaborate exploration of this point, see, for example, Lawrence Edwards’s and Robert Z. Lawrence’s excellent 2010 paper “Do Developed and Developing Countries Compete Head to Head in High-Tech?”  The answer, as Edwards’s and Lawrence’s empirical analysis shows, is clearly no – as we would expect.  Quoting Edwards and Lawrence (page 8):

We will show in the paper that there are distinctive patterns of international specialization that suggests developed and developing countries produce fundamentally different products.  Judged by export shares, the US and developing countries specialize in quite different product categories that for the most part do not overlap.  Moreover, even when they do overlap and exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitute – developed countries produce are far more sophisticated.

So there.)

But beyond identifying this error (and few other obvious ones), I’ve failed to make sense of this CPA paper.  It reads, to me, like gibberish.  Perhaps my medication has me loopy, or perhaps I’m simply a dunce.  What, for example, is to be made of the author’s first table (pictured just below)?

Screen Shot 2017-01-12 at 6.00.52 PM

The author claims that the figure of 4,522 job losses per one-billion-dollar-increase in American imports is shown in the figure.  And, indeed, I see the number “4,552” in the southeastern-most part of the figure, in the bottom line titled “Total.”  But how is it derived?  From where does this figure come?  Unlike the other numbers on that bottom line, 4,552 is clearly not the sum of the numbers in the column above it.  How does the author come by this figure?  I’ve read this piece at least a dozen times in the past couple of hours and have no idea where this number comes from.

Anyway, rather than wrestle further with this confusing essay, I am taking the lazy way out and asking you, dear Cafe patron, to help me.  What do you make of this CPA essay?  How is the 4,552 figure derived?  You may e-mail me, you may put your answer in the comments section, or both.

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Stuff for Smiles

by Don Boudreaux on January 12, 2017

in Trade

In this post of a few days ago I argued that Americans would be greatly enriched if non-Americans were to become so fond of images of smiling Americans that they – the non-Americans – became eager to give valuable good and services to us in exchange for nothing but photos of our smiling American faces.  To which the economist Wilson Mixon replied to me, by e-mail:

UnknownOf course, Hollywood does precisely what you say. Well, maybe not quite: the”serious” films show sullen or frowning faces.

DBx: Indeed, Hollywood movies are popular with many foreign audiences: we send them moving pictures of beautiful smiling Americans such as Scarlett Johansson and George Clooney and they – the non-Americans – send us in return lots of valuable goods and services. It’s a win-win (as voluntary trade always is).

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Some Links

by Don Boudreaux on January 12, 2017

in Crime, Economics, FDA, History, Regulation, Taxes, The Economy, Trade, War, Work

David Henderson is properly skeptical of Trump’s trade triumvirate of Robert Lighthizer, Peter Navarro, and Wilbur Ross – each of whom, like their bloviating new boss, is on record with many statements revealing a complete misunderstanding of trade.  A slice from David’s post:

One of President-elect Trump’s most sincerely held views is that free trade is suspect. He buys into virtually every mercantilist myth, even claiming in a recent tweet, “China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade.”

This goes way beyond mercantilism into incoherence. No trade can be a little one-sided, let alone “totally one-sided.” The reason is that when you trade, you give something up and get something in return. Trade is necessarily two-sided. Even more flabbergastingly, Trump is not complaining that Americans don’t get enough from China in return. He’s complaining that it gets too much! This massive amount of wealth that he thinks China is taking from America is, mysteriously, in the form of goods that we Americans buy from China at low prices. What nerve those Chinese people and firms have, selling us things at low prices when, Trump seems to be saying, we should prefer to buy them at high prices.

Steve Forbes rightly warns against the GOP’s dangerous “border-adjustability tax” proposal.  (HT Dan Griswold)  A slice:

Why are the Republicans doing this? They say the revenue raised will help finance a huge tax tax cut, such as getting rid of the death tax and the horrific alternative minimum tax, cutting the corporate tax rate from its disastrous 35% to a highly stimulative 20% or less and very meaningfully lightening the tax burden on individuals. These are all extremely exciting ideas and would do wonders for the economy. But enacting a big, brand-new tax to finance cuts in old taxes is a dangerous business, especially in the way the Republicans are going about it. Democrats will gleefully remind voters why prices are going up, conveniently ignoring the tax cuts. Moreover, the GOP border adjustment tax is a but a small step away from a full-blown value added tax, which has financed the bloating of governments around the world.

My Mercatus Center colleague Dan Griswold grades the performance of the American economy while it was on Pres. Obama’s watch.

Vincent Geloso discusses his favorite recent works in economic history.

Elaine Schwartz draws appropriate lessons from some recent empirical studies that show – surprise! – that minimum wages might well indeed cast some of the lowest-skilled workers into the ranks of the unemployed.

Derek Scissors summarizes foreign investment during 2016 by the Chinese.  (See also this related data source.)

My colleague Alex Tabarrok highlights one example of crappy FDA regulation.

Jeff Jacoby explains that hateful (and hate-filled) opinions are not – and ought not be treated as if they are – criminal.  His conclusion, with which I fully agree:

Society has a duty to punish a criminal’s evil deeds. But there is never a duty to punish a criminal’s thoughts, no matter how evil they may be.

George Will looks back on Alan Sokal’s good deed of 1996.

John Glaser argues – correctly, I believe – that Uncle Sam’s role as world cop is very costly indeed.

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… is from page 316 of UCLA economist William R. Allen’s 1989 collection of the transcripts of his marvelous radio addresses, The Midnight Economist; Allen often couched his addresses as a conversation between two mice, Adam and Karl – and the source of today’s quotation is one such conversation; specifically, it’s Allen’s October 1988 address “Mouse Wisdom: Foreign Investment in America”:

“We are losing control of our economic destiny,” growled Karl.  “Americans are becoming dependent on foreign landlords and foreign employers – and vulnerable to their diabolical whims.”

images“Foreign investors have little of either power or incentive to harm us,” corrected Adam.  “Indeed, foreigners are staking their wealth on American workers and customers and their productivity and prosperity.  If foreign-owned buildings are not to lose money, they must be rented to American tenants.  If foreign-owned firms are to flourish, they must hire American workers and sell to American consumers.  This is mutual dependence for mutual benefit.”

“I understand the interdependence,” said Karl thoughtfully, “but I don’t see the mutual benefit.”

“Foreign direct investment invigorates our economy with new investment, technology, and management.  We obtain more goods and services, more jobs, and more income.  And foreign investors obtain a higher return on their investments.”

DBx: I offer, for clarification, one small correction (that I’m certain Bill Allen will agree with): foreign direct investment in the U.S. enables Americans to obtain better, rather than more, jobs.  Or, alternatively, foreign direct investment in America offers Americans more job options.  Foreign investment – as with market-driven competition in general and with imports in particular – does not change the number of overall jobs in the economy; it simply improves these jobs over time.

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30 Years of Improvement

by Don Boudreaux on January 12, 2017

in Growth, Innovation, Standard of Living

In my latest Pittsburgh Tribune-Review column, I note some of the very many ways that ordinary Americans’ standard of living in 2017 is much higher than it was in 1987.  A slice:

Yet ironically, Americans’ immense prosperity in 2017 is revealed most vividly in riches that are difficult to see if you aren’t looking for them. Most of what makes Americans today materially far richer than Americans of 1987 are things that are so familiar now that we take them for granted. Consider just some of the goods and services that were unavailable to ordinary Americans 30 years ago: individual-serve coffee-makers (“Keurigs”), high-definition televisions, downloadable and streaming music, movies and TV shows, Lasik surgery, Viagra, smartphones, GPS navigation, laptop computers, the Internet.

Each of these items was attention-grabbing when first introduced. But they all became so widespread so quickly that they are today part of our landscape.

Even more hidden from view are smaller innovations that were either nonexistent or very rare 30 years ago. One of my favorites is plastic garbage bags, each with its own internal drawstring.

(To be clear: plastic garbage bags were widely available and used in the U.S. in 1987, but each such bag did not commonly have its own convenient, internal drawstring.)

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… is from page 4 of Simeon Djankov’s, Rafael La Porta’s, Florencio Lopez-de-Silanes’s, and Andrei Shleifer’s February 2002 article in the Quarterly Journal of Economics, titled “The Regulation of Entry” (link added):

buchananIn a cross section of countries, we do not find that stricter regulation of entry is associated with higher quality products, better pollution records or health outcomes, or keener competition.  But stricter regulation of entry is associated with sharply higher levels of corruption, and a greater relative size of the unoffcial economy.  This evidence favors public choice over the public interest theories of regulation.

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Here’s a letter to First Things:

Robert P. Cummins rightly calls for tax and regulatory relief (“My Orange Juice Came from Brazil,” Jan. 5).  But his essay is severely marred by his lengthy discussion of comparative advantage.  According to Mr. Cummins, comparative advantage is now “obsolete,” it having been “erased” by globalization and technological innovation.  Mr. Cummins’s is deeply mistaken.

If comparative advantage didn’t exist – exist either naturally or (as Adam Smith would have it) as the result of specialization itself – there would be no trade, including none of the trade that Mr. Cummins today finds to be both prevalent and worrisome.  Without comparative advantage, no one would benefit from buying any goods or services from others, or from producing any goods or services for sale to others.  Each individual would be self-sufficient.  Society as we know it would not exist.

The reason is that the absence of comparative advantage means that each individual confronts the same cost of producing each and every good or services as is confronted by every other individual.  In the (barely imaginable) world of no comparative advantage, I could grow the corn that I eat just as efficiently as could anyone else.  Ditto for weaving the cloth that I wear, building the automobiles that I drive, transporting myself to Paris, and performing surgery on myself.  And what would be true for me would be true for every other person.  Only in such a bizarre world would there be no comparative advantage and, hence, no trade.

Put differently, the only economic reason for trade is that each of us produces some goods or services at costs lower than the costs that our trading partners would incur to produce those same goods or services.  That is, each of us has a comparative advantage in supplying the goods or services that we sell to others, and a comparative disadvantage in supplying each of the many goods and services that we buy from others.  Therefore, because we humans continue to specialize and trade – and especially because global trade today is so vast and growing (as Mr. Cummins’s himself admits) – comparative advantage has not been “erased” or made “obsolete.”  Quite the contrary.

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

(I thank P.J. Hill and Jeff Ankrom for alerting me to Mr. Cummins’s essay.)  Other errors mar Mr. Cummins’s essay, but the comparative-advantage error is the most egregious.

Here’s a comparatively passable introduction to comparative advantage.

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In this short video, Johan Norberg busts the myth that U.S. manufacturing is in decline and that the decline in U.S. manufacturing employment is the result of trade.

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… is from page 188 of the 2016 Mercatus Center re-issue of my late colleague Don Lavoie’s superb and still-relevant 1985 volume National Economic Planning: What Is Left? (original emphasis):

unknown-2The case for the free market does not rest on any sort of belief that market forces bring the economy to some ideal equilibrium state of full adjustment.  It argues that market forces drive a process of plan coordination in which full coordination can never be attained, but which uses more knowledge than any single agent or organization can command.

DBx: Indeed so.  And for this reason – because the market is an on-going process of discovery, change, creation, and adjustment – any supposed revelation by some professor, pundit, or politician of a market ‘imperfection’ (say, monopsony ‘power’ in today’s market for low-skilled workers in northeastern Nebraska or southwestern New Jersey) creates no good case for government intervention.  Not only is there a much-better-than-even chance that this professor, pundit, or politician is mistaken (for such people are almost never actual participants in the markets on whose details they presume to pronounce) – and not only are the ‘remedies’ offered by such people ones that, being imposed by force, distort future market processes – the likelihood that alert and creative entrepreneurs will discover whatever correctible problems exist today and launch courses of action, often in competition with each other, to address these problems in the best manner possible (that is, without political influence, and with more knowledge than can be mustered by government regulators) is high.

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