Bonus Quotation of the Day…

by Don Boudreaux on November 20, 2018

in Crony Capitalism, Myths and Fallacies, Trade

… is from this August 17th, 1970, Newsweek column by Milton Friedman:

The proponents of [tariffs and import] quotas say, “Free trade is fine in theory but it must be reciprocal. We cannot open our markets to foreign products if foreigners close their markets to us.” Japan, they argue, to use their favorite whipping boy, “keeps her vast internal market for the private domain of Japanese industry but then pushes her products into the U.S. market and complains when we try to prevent this unfair tactic.”

The argument sounds reasonable. It is, in fact, utter nonsense. Exports are the cost of trade, imports the return from trade, not the other way around.

DBx: Only by falsely supposing that a country is a company does the absurd notion that imports are a cost and exports a benefit continue to persist.

Of course, producers who seek government-enforced protection from foreign competition have every interest in perpetuating this myth. (Indeed, some of these producers might even come to believe this myth to be true.) The greater are the number of people who believe that imports are a cost and exports are a benefit, the greater are the number of people who are easily duped into supporting protectionist policies that actually harm them as these policies artificially enrich a handful of domestic producers.

Domestic producers who get, or who sniff that they might be able to get, the government to harass their fellow citizens who wish to buy imports are an astonishingly greedy and anti-social lot. They believe themselves to be superior to their fellow citizens; they believe themselves to be entitled to a portion of their fellow citizens’ incomes; and they are shameless at concocting ridiculous excuses and hypothetical tales in their attempts to connive the public to endorse their plunder.

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Here’s a letter to USA Today:

Glenn Reynolds correctly notes that were Pres. Trump to use antitrust to break up or regulate Amazon, Google, and other of today’s large and cutting-edge companies he would follow in the footsteps of Pres. Teddy Roosevelt (“Donald Trump must bust Facebook, Amazon, Netflix, Google monopolies like Teddy Roosevelt,” Nov. 19). But Prof. Reynolds incorrectly assumes that such government intervention by Roosevelt was necessary and beneficial.

Economic historians who look at the actual data know that Standard Oil, Swift & Co., and the other alleged monopolists of the so-called “gilded age” generally pushed prices lower and outputs higher. And contrary to Prof. Reynold’s suggestion, these companies where extraordinarily innovative. To pick only the most famous example: John D. Rockefeller repeatedly managed to lower Standard’s costs of operation and to find ever-larger numbers of useful products to make from petroleum.

Yet despite Rockefeller’s large market share – which he earned by successfully serving consumers – Standard remained subject to vigorous market competition. By the time Roosevelt launched his antitrust assault on Standard in 1907, that company’s market share had fallen from more than 90 percent in the late 1890s to 68 percent. And when Standard was broken up four years later, its market share was down even further, to 64 percent.*

Also, Prof. Reynold’s celebration of Roosevelt’s use of antitrust to break-up the Northern Securities railroad conglomeration is ironic. As Prof. George Bittlingmayer showed in a famous 1985 paper,** the merger wave of the early 20th century – which included the merger that created Northern Securities – was itself the result of the use a few years earlier of antitrust to prevent individual firms (especially those with high fixed costs, such as railroads) from pricing their outputs in ways that help them to remain solvent during economic slumps. That is, without antitrust there would have been no Northern Securities for Roosevelt to break-up.

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

* See Donald J. Boudreaux and Burton W. Folsom, “Microsoft and Standard Oil: radical lessons for antitrust reform,” Antitrust Bulletin, Fall 1999, pp. 555-576.

** George Bittlingmayer, “Did Antitrust Cause the Great Merger Wave?Journal of Law & Economics, April 1985, pp. 77-118.

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Quotation of the Day…

by Don Boudreaux on November 20, 2018

in Hayek, Hubris and humility, Scientism

… is from page 74 of F.A. Hayek’s brilliant 1945 lecture “Individualism: True and False,” as this essay is reprinted in Studies on the Abuse & Decline of Reason, Bruce Caldwell, ed. (2010), which is volume 13 of the Collected Works of F.A. Hayek (footnote deleted):

What individualism teaches us is that society is greater than the individual only in so far as it is free. In so far as it is controlled and directed, it is limited to the powers of the individual minds which control or direct it. If the presumption of the modern mind, which will not accept anything that is not consciously controlled by individual reason, does not learn in time were to stop, we may, as Edmund Burke warned us, “be well assured that everything about us will dwindle by degrees until at length our concerns are shrunk to the dimensions of our minds.”

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A Country is Not a Company

by Don Boudreaux on November 19, 2018

in Balance of Payments, Myths and Fallacies, Trade

The inclination to think of a country as a for-profit company is powerful. This inclination is at the root of nearly all mercantilist errors, including the myriad ones committed by Trump, Navarro, Lighthizer, and Ross. And while a mercantilist of old was partly justified to have this inclination, at least insofar as his concern was to maximize the wealth of the crown, there is absolutely no justification today to cling to the false notion that a country such as the United States is – or even is akin to – a for-profit company. And yet balance-of-payments (or balance-of-trade) accounting continues to foster this absurd and dangerous notion.

In my latest column for AIER I attempt to explain why balance-of-payments accounting misleadingly conveys the notion that a country is a company. Here’s my conclusion:

Unfortunately, the fact that accountants use arithmetic to calculate the aggregate of Americans’ earnings, spending, borrowing, and lending causes people to adopt the premise that the American economy is an economically relevant entity that earns, spends, borrows, and lends in the same way as a household and a corporation.

But this premise is false. Regrettably, as long as it continues to be the starting point of discussions of trade and trade policy, it will generate false conclusions that, in turn, spawn destructive government interventions.

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Robert Samuelson points to a new study that further busts the myth that the American middle class has for decades now stagnated economically. (HT Ross Kaminsky) Here’s his conclusion:

All the numbers seem complex and confusing. Piercing the statistical fog is essential to anchor our debates in reality and not in journalistic or political mythology. It may seem that, except for the fortunate few, hardly anyone is getting ahead. That’s convenient rhetoric, but it just ain’t so.

Richard Ebeling warns of presidential hubris.

David Henderson is reading more of Armen Alchian’s work. (Readers of this blog know that I regard Alchian as one of the greatest economists of all time. It’s a deep shame that he was never awarded the Nobel Prize.)

Tim Carney has identified the two losers from the recent competition for Amazon’s HQ2: Arlington, VA, and Queens, NY.

Dan Mitchell celebrates the mass prosperity unleashed by widespread acceptance of bourgeois virtues.

Damon Root offers his run-down of the five worst U.S. Supreme Court decisions of the past 50 years.

Charles Calomiris describes socialism as “the opiate of the corrupt and ignorant.” Spot-on.

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… is from page 87 of my colleague Richard Wagner’s superb 2017 intellectual biography of Jim Buchanan, James M. Buchanan and Liberal Political Economy:

There can be many reasons why someone might think some modicum of force might be necessary to maintain good civil order. It is impossible, however, to guarantee that force will be limited to maintaining good civil order. Force will be deployed as its holders choose to deploy it. This is a basic, irremediable quality of human nature.

DBx: Without question, the most common serious error committed by those who look to the state to ‘solve’ problems (whether real or imaginary) is their assumption that the power they call upon will be used as they wish it to be used and never, or seldom, as they wish it not to be used.

Those who call on the state today are, with one significant difference, very much like people who pray to god to intervene in human affairs: god – being all-powerful, all-knowing, and all-good – will answer worthwhile prayers precisely as the petitioners plead while never, ever abusing the godly power. The difference is that, unlike with god, there is absolutely no question of the state’s existence. No one doubts, or can possibly doubt, that the state exists and intervenes in human affairs.

And as I think about the matter, I see another difference: also unlike god, the state rarely acts in mysterious ways. A sound understanding of state action begins with public-choice scholarship.

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Quotation of the Day…

by Don Boudreaux on November 18, 2018

in Balance of Payments, Myths and Fallacies, Trade

… is from Gerard Gayou’s November 16, 2018, essay in the Wall Street Journal titled “A Trade Deficit Isn’t a Mortgage“:

First, the trade deficit reflects only one side of a national accounting ledger. Whereas a homeowner might never see his money or house again after repaying the bank for a reverse mortgage, that’s not true for nation-states. When Americans send dollars abroad to buy Chinese shoes, those dollars will likely come back in the form of capital inflows.

That’s why the U.S. capital account, which measures net investment in the country, has a capital surplus equal to the U.S. trade deficit. Chinese shoe salesmen who receive American dollars choose to reinvest greenbacks in dollar-denominated assets. This investment then produces more factories and jobs in the U.S. – something protectionists inexplicably ignore.

DBx: To pick a negligible nit, Gayou, in the second paragraph above, should instead have written “That’s why the U.S. capital account, which measures net investment in the country, has a capital surplus equal to the U.S. current-account deficit.” This nit is indeed negligible because “trade deficit” is often used as a synonym – mistakenly but forgivably in most discussions – for “current-account deficit.”

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My Mercatus Center colleague Emily Hamilton – who was once a student of mine – calls in the Washington Post for an easing of zoning restrictions.

Mark Perry highlights a reason for us Americans to be thankful this Thanksgiving.

Speaking of Thanksgiving, I recently read Melanie Kirkpatrick’s 2016 book, Thanksgiving. It’s wonderful.

My colleague Pete Boettke makes the case for permissionless innovation.

My intrepid Mercatus Center colleague Veronique de Rugy weighs in against the cronyism that infected Amazon’s HQ2 ‘competition.’

In my latest column for the Pittsburgh Tribune-Review, I too express my anger at Amazon and at cronyist government policies.

In this video, John Stossel busts some myths about single-payer healthcare.

I just love Jeffrey Tucker’s essay on the movie Bohemian Rhapsody and the richness of commercial culture. (And I thank Jeff for finally helping me to put my finger on why I didn’t like Immortal Beloved as much as I expected to like it.) A slice:

But even here, the perception that commerce would taint serious music persisted. And it persisted despite all evidence. G.F. Handel moved from Germany to Italy to England chasing commercial opportunities. He reused tropes from his Italian liturgical music for his English oratorios. And the themes of his oratorios finally settled on stories from Hebrew scriptures precisely because these stories experienced popular success in 18th-century England.

Some people might imagine that someone like J.S. Bach would be free from such grubby commercial dealings, but his hundreds of cantatas were written as a job obligation in exchange for wages. His famous Brandenburg Concertos were composed as demonstration projects when seeking a new gig. And just as with later composers like Johannes Brahms, he paid the bills through teaching far less than through performance. Other composers like Gioacchino Rossini and Giuseppe Verdi experienced wild popular success, while Richard Wagner became the subject of a cult of his own.

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… is from page 72 of my colleague Richard Wagner’s excellent 2017 intellectual biography of Jim Buchanan, James M. Buchanan and Liberal Political Economy:

Without a constitutional requirement of uniformity in taxation, post-constitutional politics will generate increasingly complex revenue systems as tax favors are granted and removed within the political marketplace. The resulting narrowing of the tax base warps processes of collective choice. For instance, those who are favored by the resulting fiscal discrimination will support more collective activity than they would otherwise support. With the continual churning of the tax code that results, however, most participants may end up worse off than they would have been under a simple system of tax uniformity.

DBx: This reality looms large among the economic and political-economy reasons for objecting to that species of competition among governments that resulted in Amazon choosing to locate its new HQ2 in Arlington, VA, and Queens, NY.

As Dick points out, not only does such cronyist competition among governments to attract businesses result in an unnecessarily complex tax code, it results also in a further weakening of the incentives of the private parties who win these special tax breaks to consider the costs of proposed future government programs and to compare these costs to the benefits of the programs. If I will shoulder only disproportionately small shares of the fiscal burden of proposed programs, I’m disproportionately likely to support – or at least not to object – to those programs.

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Here’s a letter to the Wall Street Journal:

Gerard Gayou eloquently explains some of the several errors that infect President Trump’s, and trade advisor Peter Navarro’s, understanding of trade deficits (“A Trade Deficit Isn’t A Mortgage,” Nov. 16).

Here are three additional pieces of data that belie the Trump administration’s insistence that trade deficits are economically harmful to Americans. Compared in inflation-adjusted dollars to 1975,* the last year in which America ran an annual trade surplus,

the size of the capital stock in America is today nearly three times as large;

the total value of financial assets owned by American households and nonprofit organizations is today four-and-a-half times larger;

the total net worth of American households and non-profit organizations is today four times higher.

Even the most contorted and illogical train of ‘reasoning’ can’t even begin to square these realities with Messrs. Trump’s and Navarro’s claims about trade deficits.

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

* When I had to adjust for inflation, I used this calculator (which, because it uses the consumer price index, almost certainly overstates inflation and, hence, understates the growth in the real value of the reported figures).

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