Bonus Quotation of the Day…

by Don Boudreaux on November 5, 2017

in Myths and Fallacies, Seen and Unseen, Trade

… is from pages 8-9 of the 1983 collection of some of the writings of the late G. Warren Nutter, entitled Political Economy and Freedom; specifically, it’s from Nutter’s 1974 essay “Freedom in a Revolutionary Economy”:

Good often issues more from powers denied to government than from those granted, this this was surely the case as far as economic development over our republic’s first century is concerned.  None of the prohibitory provisions of the Constitution was to take on greater significance than the one forbidding individual states to erect barriers to commerce among themselves.  Making trade free  with an internal market that was to expand to vast proportions permitted the nation to indulge, for example, in recurrently restrictive tariffs, as the politics of a good century and a half seemed to dictate, without serious hindrance to economic progress.  Our great market was to lie at home in a free-trade area larger than the world has yet experienced anywhere else.

DBx: Among protectionists’ favorite arguments in support of using tariffs to artificially restrict Americans’ access to imports is the historical fact that Uncle Sam practiced a great deal of protectionism in the 19th century.  Because the 19th century also witnessed for the United States historically unprecedented economic growth – and because Alexander Hamilton, Henry Clay, and other American protectionists asserted that tariffs promote growth – protectionists today conclude that, yessir, tariffs promote growth.

It’s trite but true – and relevant – to point out that correlation isn’t causation.  But if today’s protectionists insist on inferring causation from this correlation, they have a real problem if they are Trumpians.  The reason is that the 19th century was also a century of largely open immigration.  So to be consistent, “America Firsters” who fall for the argument that tariffs promoted 19th-century American economic growth must also agree that this growth was promoted also by open immigration.  (Reality, being highly complex and dynamic, can be understood only through theoretical lenses.  And while theory gives us good reason to believe that immigration does indeed promote economic growth, it also warns us not to fall for the claim that tariffs promote economic growth.  In short: immigration causes scarcity to decrease while tariffs cause scarcity to increase.)

But the biggest problem with the “tariffs-promoted-19th-century-American-growth” assertion is that when you investigate the matter in detail you discover that the assertion doesn’t stand up to the facts.  First there’s the research of Doug Irwin (here and here).  (See also this paper, by Bohanon and Van Cott, on the role of liberal immigration in helping to overcome the depressing economic effects of 19th-century tariffs in America.)

Second is the truth mentioned above by Nutter: being a vast nation with a growing population – and, by the way, with a largely free-market, private-property-rights-based economy – the free trade that occurred within the United States was able to promote economic growth.  This growth would surely have been even greater were the size of America’s market even larger – that is, were Americans able to buy and sell more freely abroad.  If government policies that artificially increase scarcity are the great boon to economic growth that protectionists insist them to be, then protectionists must believe that U.S. economic growth would have been even more impressive if each state were not prevented by the U.S. Constitution from protecting in-state suppliers from out-of-state rivals.  Yet Americans have from the 1789 forward enjoyed largely the absence of internal trade barriers.  Protectionists have yet to offer a good response to this challenge: if tariffs around the U.S. promoted U.S. more economic growth, why wouldn’t tariffs around each individual state promote yet more economic growth in each of the states?

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Quotation of the Day…

by Don Boudreaux on November 5, 2017

in Myths and Fallacies, Seen and Unseen, Trade

… is from page 61 of Winston Churchill’s February 19th, 1904, speech at Free Trade Hall in Manchester – delivered at the inaugural meeting of the Free Trade League – as this speech is printed in the 1977 volume For Free Trade, a collection of some of Churchill’s early speeches on trade:

We Free Traders are often told that we should consider the producer more, and not think so much about the consumer.  The great manufacturers are the largest producers in the country, but they are also by far the largest consumers.  The more they produce, the more they have to consume.  The bigger the mill, the more it costs to run.  The manufacturer, therefore, wants one thing dear – the thing he sells – and a hundred things cheap which he uses.

DBx: There’s no doubt that government can artificially enrich a handful of producers (and their employees) with tariffs and other policies that artificially increase the scarcity of the things that are supplied by this handful of producers.  Those who make an economic case for protectionism are much impressed by this artificial enrichment.  Indeed, protectionists are so very impressed by this observed artificial enrichment that it leads them to commit the fallacy of composition (among other errors, both theoretical and empirical).  But as Churchill here suggests, the greater the extent of trade barriers, the more each domestic producer suffers rising costs of production.  The economic case for protectionism is deeply illogical: a country’s people cannot all be enriched by policies that decrease the availability of goods and services, including that of inputs to production.

The protectionist is either a sad or a despicable figure.  He’s a sad figure if he truly believes that people generally are enriched by any government policy that obstructs their access to goods and services.  It’s sad that anyone clings to such illogic.  The protectionist is a despicable figure if, while himself knowing better, he uses this logical fallacy to dupe others into supporting a policy that enriches him at their expense.  It’s my experience that the ranks of protectionists are well-manned with both sorts, the sad and the despicable.

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Some Links

by Don Boudreaux on November 5, 2017

in Books, Budget Issues, History, Music, Property Rights, Taxes, Video

George Will has high praise for Ron Chernow’s biography of Ulysses S. Grant.

Sam Staley reviews the movie Marshall.

In this video, my colleague Walter Williams busts myths about the distribution of the burden of taxes in the United States.

Also busting myths about taxes is Thomas Sowell.

Scott Sumner looks at the current G.O.P. tax-reform proposal and wonders if the 2016 election was won by Bernie Sanders.

Here are the results of a survey on the state of free speech and tolerance in America.

I’m eager to read Bradley Gardner’s new book about China.

Fifty years ago this month the great Bruno Leoni was murdered.  Gary Galles remembers this vitally important scholar.

Fred Smith reminds us of the importance of property rights.

Later this month in London, Steve Landsburg will deliver the I.E.A.’s 2017 Hayek Lecture.

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Just Cronyism

by Don Boudreaux on November 4, 2017

in Crony Capitalism, Myths and Fallacies, Prices, Trade

We in the 21st century fancy ourselves as being far too intelligent to fall for the superstitions that were commonly accepted as capital-T Truths during medieval times.  Alas, when it comes to economic matters this fancy is frequently fallacious.

Here’s one instance: Uncle Sam’s procedures for determining whether or not the prices of imports are “unfairly” low.  Import prices determined to be “unfairly” low give rise, of course, to government obstacles to consumers’ access to these low-priced imports.

These government procedures are byzantine – or, more accurate still, devilish.  These procedures are all ostensibly premised on the antediluvian myth that there exists an objectively correct price for each good or service, and that sellers who charge prices different from these ‘just prices’ are wrongdoers deserving to be punished.

No one with a scintilla of good sense and objectivity can encounter Uncle Sam’s and other modern governments’ attempts to define ‘correct’ prices for imports without concluding that modern government officials either really do believe in medieval hocus-pocus or that these officials shamelessly practice economic witchcraft in their attempts to hide from the general public the fact that their declarations of ‘unfairly low prices’ are nothing more than excuses to line the pockets of politically powerful producer groups at the expense of the general public.

My money is on the latter explanation.  It’s all cronyism and thievery that gets a pass from an economically uninformed public – a public that, like their medieval ancestors, are too easily duped into believing that there is such a thing as objectively correct prices, and that high officials not only are capable of deciphering what these ‘correct’ prices are, but also can be trusted to do so in the public interest.  It’s all-around appalling and shameful.

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Yet More Nancy MacLean Carelessness

by Don Boudreaux on November 4, 2017

in Books, Myths and Fallacies

Phil Magness finds archival documents that Nancy MacLean – already exposed as historically careless and comically incompetent in her ‘scholarship’ – missed in her “research” on the work of my late Nobel-laureate colleague Jim Buchanan.  Here’s Phil’s conclusion:

In any case, the newly uncovered 1964 appendix only illustrates how far off base MacLean’s claims are in relation to Buchanan’s actual activities and positions. Far from aligning with the “massive resistors,” Buchanan’s position on segregation was consistently critical and his view of vouchers consistently held that they could be used to alleviate the ills of this institution. Democracy in Chains warrants a substantial correction by its publisher, if not outright retraction on account of its numerous and pervasive errors of historical fact.

DBx: Nancy MacLean is to scholarship what Cap’n Crunch is to nutrition.  (Pardon me here if I unduly insult Cap’n Crunch.)

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Quotation of the Day…

by Don Boudreaux on November 4, 2017

in Myths and Fallacies, Taxes, Trade

… is from pages 117-118 of the 2015 Fourth Edition of Dartmouth economist Douglas Irwin’s superb book, Free Trade Under Fire (footnote deleted):

How much are imports to blame for the job losses experienced in any given year?  Not much.  Changes in consumer tastes, domestic competition, productivity growth, and technological innovation, in addition to international trade, all contribute to the churning of the labor market.  It is virtually impossible to disentangle all of the reasons for job displacement because they are interdependent: for example, technological change may be stimulated by domestic or foreign competition.  Yet to the extent that such attributions are made by the [United States] Bureau of Labor Statistics, trade is a tiny factor in the displacement of labor.  As table 4.1 shows, import competition and overseas plant relocations accounted for about 3 percent of total employment separations due to mass layoffs in recent years.  During the recent Great Recession, layoffs topped two million in 2009, but less than 1 percent of those job losses were due to import competition.

In fact, study after study has confirmed that the trade-induced number turnover in U.S. labor markets is small in comparison with the overall turnover.

DBx: I confess to being unusually annoyed whenever someone accuses me or other academic economists who support free trade of doing so because many of us are tenured.  Forget that we do not make the rules of academic employment.  (I, for one, would happily abolish the tenure system were it in my power to do so.  I’d prefer to take more of my compensation in the form of cash rather than in the form of institutionally enforced greater job security.)  Forget that I, and most academic economists who support free trade, supported free trade long before we became tenured.  (I became a free-trader at the age of 18 as a college freshman at Nicholls State University.)  Forget that an ad hominem argument is an argument rooted in a logical fallacy.  Forget also that to protect some domestic-economy jobs from import competition is to destroy other domestic-economy jobs.

Focus instead on the fact that no one blinks an eye when an academic economist argues that markets should be competitive, or when an academic economist writes favorably about entrepreneurship.  If (contrary to fact) it were true that tenure disqualifies an academic from pointing out the enormous net benefits of free trade (and, because of those benefits, from advocating a policy of free trade), then tenure should also disqualify an academic from pointing out the more general reality that there are enormous net benefits of market competition.

In reality, everyday market competition for consumers’ expenditures and the freedom of consumers to change how they spend their incomes cause far more job losses (and job creation) than do changes in trade patterns that span across politic borders.

American conservatives are fond of saying, when advocating tax cuts, that “workers should keep more of their own incomes.”  I fully and enthusiastically agree that those who earn incomes should keep more of their own incomes while the taxman gets as little as possible.  But many of the same conservatives who proudly intone that “workers should keep more of their own incomes” turn around and, in the next breath, advocate higher tariffs.  These conservatives are deeply inconsistent.  Higher tariffs are higher taxes.

More fundamentally, the value of keeping more of your own income is reduced if the government puts artificial restraints on how you may spend that income.  If the income truly is yours – if the government has no right to take it in the form of taxing it when you earn it. – by what mysterious process does the government get a right to take that income when you spend it?

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What if subsidies were called “artificial burdens”?  Would mercantilists and other trade skeptics continue to fall for the fallacious claim that a government that subsidizes some exporters within its jurisdiction engineers an advantage for its economy or otherwise enriches its people at the expense of the rest of the world?  Doubtful.  Language matters.

Note that, because every dollar’s worth of resources given as a subsidy by a government are diverted from some other uses within the economy under that government’s jurisdiction, every dollar of subsidy given to X is a burden on fellow-citizen Y.  Further, because resources driven by subsidies from Y to X are not directed to X by market forces – that is, because those resources are driven away from where the market would direct them (Y) and toward where government officials instead direct them (X) – the ‘weight’ of the burden of each dollar’s worth of subsidies to those who bear this burden is nearly always heavier than the artificial, subsidy-enabled ease enjoyed by the subsidies’ recipients.

So if we simply start calling subsidies according to where they come from, rather than where they go to, people would be far less likely to mistake the existence of government subsidies artificial burdens as a clever means through which governments enhance their people’s wealth.

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Here’s a letter to National Review Online:

The usually astute Derek Scissors gets much wrong in making a case for U.S. government retaliation against Chinese export subsidies and trade restraints (“How China Cheats,” Nov. 2).

Most startling of Mr. Scissors’s claims is this one: “When [Beijing] wants production to ramp up, it can grant free land, free energy, and repayment-optional bank loans to firms making what Beijing wants them to make.”

Not so.  Any land, energy, and other resources that Beijing grants to politically favored firms are necessarily withdrawn from other productive uses.  Thus, these subsidies aren’t free; they reduce output elsewhere in China’s economy.  And because such redirection of resources would not occur absent Beijing’s command, we can be confident that these subsidies direct resources away from higher-valued to lower-valued uses.  China’s economy is thereby weakened and not strengthened.  Further, the resulting artificially lower prices that Americans pay for Chinese-made goods enrich Americans no less than if those low prices resulted from genuine efficiency advantages of Chinese suppliers.

If Beijing wants to impoverish its people in order to enrich us Americans, we can pity Chinese citizens.  But we shouldn’t respond with policies that make us 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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Richard McKenzie explains how the transitional-gains trap – first identified in 1975 by my late colleague Gordon Tullock – explains much of today’s political maneuvering.

Brittany Hunter acknowledges some beneficial moves by Trump (who deserves applause especially for appointing GMU law-school prof Neomi Rao to lead OIRA).

On trade, of course, Trump’s policies would be calamitous – including, as John Brinkley explains, what he’s threatening to do with NAFTA.  A slice:

There is no scenario under which withdrawing from NAFTA would benefit the United States economically.

And Bob Higgs is eloquent on Americans’ trade with Mexicans.  A slice:

The so-called protectionism being touted by President Trump and his supporters is little more than picking the pockets of U.S. consumers. Note, however, that much of the goods imported from Mexico consists not of immediately consumable goods, but of producer goods (e.g., petroleum, automobile parts, and components of a vast array of other manufactured goods) that help to make U.S. goods better and cheaper than they otherwise would be. The Trumpistas suppose that exports are a benefit and imports a regrettable thing [that] ought to be reduced as much as possible. In this regard, they have matters upside down: imports are what Americans value; exports are directly or indirectly only a means of importing the valuable goods. If you doubt this claim, simply imagine what would be the case if Americans regularly sent vast quantities of goods abroad and got back no goods at all. This situation would give rise to an infinitely positive balance of trade—and amount to an economic disaster. Sad to say, the Trump forces have infused new life into mercantilist fallacies that were debunked centuries ago by Adam Smith, David Ricardo, and a host of economists since their day. It is sad to contemplate how many voters prefer picking their neighbors’ pockets to honestly earning their own way in open competitive markets.

Jeffrey Tucker is correct to argue that free labor markets offer an excellent defense against sexual harassment.

Ben Zycher rightly deplores the some policies of the Union of Concerned Scientists. (By the way, whenever I encounter the name of this group I wonder if there is somewhere a Union of Unconcerned Scientists.)

My Mercatus Center colleague Dan Griswold argues that Trump is right, but for the wrong reasons, to call for the elimination of the diversity lottery visa program.

I very much like the passage that Arnold Kling quotes here from Jean Tirole’s new book.

Warren Meyer is right to cringe at these images.

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Quotation of the Day…

by Don Boudreaux on November 3, 2017

in Virginia Political Economy

… is from page 278 of my late Nobel laureate colleague Jim Buchanan‘s 1987 paper “Market Failure and Political Failure,” as this paper is reprinted in James M. Buchanan, Federalism, Liberty, and Law (2001), which is volume 18 of the Collected Works of James M. Buchanan:

Almost all observed market arrangements generate results that fall short of achieving the ideal.  The reasons are familiar.  Such an assessment of failure does not, however, carry any implication for ultimate institutional or policy change until and unless a pattern of results from an alternative set of arrangements demonstrated to be feasible can be shown to exist.

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