Quotation of the Day…

by Don Boudreaux on September 20, 2018

in Agriculture, Crony Capitalism, Subsidies

… is from page 312 of Jonah Goldberg’s 2008 book, Liberal Fascism:

There is no sector of the American economy more suffused with corporatism than agriculture. Indeed, both Democrats and Republicans are decidedly fascistic when it comes to the “family farmer,” pretending that their policies are preserving some traditional völkisch lifestyle while in reality they’re subsidizing enormous corporations.

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Bonus Quotation of the Day…

by Don Boudreaux on September 19, 2018

in Myths and Fallacies, Subsidies, Trade

… is from page 3 of Charles Schultze’s Fall 1983 Brookings Review article, “Industrial Policy: A Dissent“:

[R]eality does not square with any of the four premises on which the advocates of industrial policy rest their case. America is not de-industrializing. Japan does not owe its industrial success to its industrial policy. Government is not able to devise a “winning” industrial structure. Finally, it is not possible in the American political system to pick and choose among individual firms and regions in the substantive, efficiency-driven way envisaged by advocates of industrial policy.

DBx: Schultze was Chairman of the Council of Economic Advisors for all of Jimmy Carter’s tenure in the White House. And while he here wrote of Japan – for Japan was then the nation that all the Americans then in the know then knew would do in America with its clever state interventions and trade restrictions – his words ring just as true today for China.

My only amendment to Schultze’s quotation is that under no political system is it possible for a government to “pick and choose among individual firms and regions in the substantive, efficiency-driven way envisaged by advocates of industrial policy.”

(I learned of Schultze’s essay from page 760 of Doug Irwin’s remarkable and monumental 2017 volume, Clashing Over Commerce.)

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Some Links

by Don Boudreaux on September 19, 2018

in Antitrust, Books, Competition, Taxes, Trade

An ideal U.S.-U.K. free-trade agreement. (HT Iain Murray)

I disagree with several specific points made here by Irwin Stelzer, but I agree with him that it’s foolish for anyone to fall for the line that Trump is really angling for a world of vastly lower tariffs. A slice:

Finally, there is the not-small matter of the president’s irremediable ignorance of economic affairs, combined with his tendency to confuse wish with reality. When Apple CEO Tim Cook complained that tariffs would drive up the cost of made-in-China gadgets, Trump became Apple’s business consultant. Make iPhones here, avoid the tariffs and you will have no need to raise prices, he insisted. But the transfer of manufacturing operations to America would surely result in higher costs of production, necessitating price increases. Otherwise, Cook would not have been producing Apple’s iThis and iThat in China in the first place.

Max Gulker argues that the benefits of some of Trump’s tax cuts will be cancelled out by the costs of Trump’s tax hikes (that is, Trump’s tariffs). Here’s his provocative conclusion:

For those who think these tariffs are simply a negotiating tactic to correct China’s bad actions, let me make another suggestion. Perhaps enacting the overall corporate tax cut first was also a tactic, to soften up potential resistance when the deluge of tariffs began.

Bob Higgs counts his blessings.

And Bryan Caplan tells a true story with a happy ending.

Richard Epstein has a more favorable view of antitrust regulation than I have; nevertheless, he is rightly – and highly – skeptical of a new case that is made for antitrust action against Amazon.

Steven Teles has lost any patience that he might once have had with that writer of fabulist tales, Nancy MacLean. Here’s his opening paragraph:

I have honestly tried as hard as possible to maintain my equilibrium and good nature when engaging with Professor Nancy MacLean around the subject of her book, Democracy in Chains. And I sincerely attempted to have my say last year in a couple of pieces with Henry Farrell and leave it at that, but Professor MacLean insists on repeating outright falsehoods that could be avoided by a two minute Google search.

My intrepid Mercatus Center colleague Veronique de Rugy explains that Americans are voting on taxes with their feet.

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Mr. Wilbur Ross
Secretary of Commerce
Washington, DC

Mr. Ross:

Yesterday on CNBC you repeated your absurd claim that the harm that Americans suffer from tariffs is irrelevant. “Because it’s spread over thousands and thousands of products,” you assert, “nobody’s going to actually notice it at the end of the day.”

Forget that many of the resulting price hikes are indeed significant, such as the 16 percent rise in the price of washing machines. Instead, recognize that spreading costs so thinly so that they are not ‘noticed’ does absolutely nothing to justify them. Because economics is clear that the benefits of tariffs nearly always fall short of the costs of tariffs, these costs are no more justified because they are not ‘noticed’ than they would be if they were acutely and fully felt.

By your (il)logic, a person who is daily fed portions of poison so tiny that he never notices the damage inflicted daily on his body is not harmed, despite the fact that the process of poisoning this person will eventually cripple and perhaps even kill him. By your (il)logic, a head tax of $1 annually on each American that generates proceeds to be deposited into my personal bank account is also ethically and economically acceptable because, being spread over hundreds of millions of Americans, “nobody’s going to actually notice it at the end of the day” while I will most certainly notice my swelling bank account.

Indeed, the fact that the costs of tariffs typically go unnoticed is a bug rather than a feature of tariffs. As economists have long lamented, precisely because the costs of tariffs, being spread thinly, are more difficult to notice than are tariffs’ benefits, which are concentrated, there exists a political bias toward imposing tariffs despite the fact that their total costs exceed their total benefits.

I congratulate you on becoming a poster-boy for the validity of economists’ identification of the biases on which the plunder of protectionism rests.

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

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Sub-optimal Optimality

by Don Boudreaux on September 19, 2018

in Competition, Myths and Fallacies, Prices, Seen and Unseen

For my 60th birthday last week, my son, Thomas – in addition to surprising me by driving home for the weekend – gathered into a bound volume printed copies of all of the posts that I wrote for Cafe Hayek during its first year (April 2004 through April 2005). This gift is creative, lovely, and very much appreciated. (To Thomas: Thanks again, my son!)

Flipping through this volume, I stumbled upon this post from August 27th, 2004, titled “Down with Blackboard Literalism!” It deals with a retired-economist’s objection to a letter of mine in the New York Times on the benefits of so-called “price gouging” when natural disasters occur. In short, this economist denied that such high prices are beneficial by asserting that they are monopoly prices.

I’ll not repeat here the reaction that I shared in my long-ago blog post, save to say that, even if these high prices are explained by economists’ textbook theory of monopoly, this fact does not by itself justify government-imposed price ceilings. Let me further explain.

Suppose that on the day after hurricane Stormy wreaks massive destruction on Miami each and every surviving hardware store and supermarket in Miami possesses what economics textbooks today describe as “monopoly power.” Further suppose that all of these merchants fully exploit this monopoly power as predicted by the textbooks. That is, the quantities of (say) hourly sales volumes will be such as to equate each merchant’s marginal costs with its marginal revenues. And as every economist knows, if each of these merchants’ demand curves slopes downward – as they do if these merchants each possesses monopoly power – then each of these merchants will maximize his or her profits by selling a sub-optimally low quantity of outputs and charging excessively high (“monopoly”) prices.

A fully informed and apolitical government could then impose price ceilings that cause each merchant to sell that amount of output that each merchant would sell if he or she were in a “perfectly competitive” market. And these government-ceilinged prices would mimic “perfectly competitive” prices. The blackboard literalist would cheer this outcome. Yay state!

But notice what the blackboard literalist does not notice. While these government-ceilinged lower prices achieve optimality in the moment, they prevent the achievement of better conditions in the future. As the truly competent economist would explain matters, when suppliers are prevented from charging prices above marginal costs and from earning super-normal profits, there is no incentive for new suppliers to enter the market in competition with existing sellers. And yet, in a region devastated by a natural disaster, having new suppliers enter the market is especially beneficial. Government-imposed price ceilings drain away all incentives for such entry.

As a sensible non-economist would put it, because what is needed most when a natural disaster strikes is a large infusion of new supplies – more potable water, more blankets, more canned food, more propane, more plywood, more first-aid products. But by pushing today’s prices down, government-imposed price ceilings discourage rather than encourage suppliers and potential suppliers from bringing more supplies into the devastated region.

Here’s Joseph Schumpeter writing in 1942 (in Capitalism, Socialism, and Democracy, p. 83):

A system – any system, economic or other – that at every given point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long-run performance.

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Quotation of the Day…

by Don Boudreaux on September 19, 2018

in Myths and Fallacies, Trade

… is from Scott Sumner’s recent EconLog post “Are tariffs a big threat to China?“:

When Siamese twins get into a knife fight, it’s hard to envision either side winning.

DBx: Scott here refers to the reality that, over the past few decades, we Americans and the Chinese people have become more economically integrated with each other. We rely upon the Chinese for consumer goods and inputs; they rely upon us similarly. Despite all the many market distortions introduced over the years by governments on both sides of the Pacific, this economic integration overwhelmingly reflects comparative advantages, both ‘natural’ and ‘contrived.’ (Note that a ‘contrived’ comparative advantage is no less a comparative advantage because of it being contrived. My eye-surgeon’s comparative advantage at performing surgery on human eyes was contrived by her choosing several years ago to spend many years to acquire this skill. Yet her comparative advantage at performing eye surgery is no less real, and certainly no more objectionable, than it would be had she, by some miracle, been conceived in her mother’s womb with all the skill and knowledge necessary to be an excellent eye surgeon.)

Economically uninformed people tend to assume that much, perhaps most, of what happens economically occurs largely either by design or by happenstance. If today’s intricate pattern of mutual dependence for raw materials, intermediate goods, specialized skills, and consumer goods and services wasn’t designed by anyone (and it emphatically was not), then – the economically uninformed person unthinkingly concludes – this pattern is more or less random. Shake it up, disturb it, change it, so what?: any source of supplies of raw materials, intermediate goods, specialized skills, and consumer goods and services is likely as good as any other.

But the truth is that the economic arrangements that we Americans and the Chinese people have developed with each other over the years and that prevail today are not random; these arrangements largely reflect the lowest-cost – the “optimal” – possibilities available to Americans and to the Chinese. Sever, block, or obstruct these supply channels with trade restrictions and you harm parties on both sides of the Pacific.

…..

To take Scott’s Siamese-twins analogy one step further – or, perhaps, to modify it inappropriately – let’s ask how twin Sam should respond when his Siamese-twin brother Song engages in self-immolation. Song’s self-destructive action will, of course, harm Sam. And it’s possible that if Sam “retaliates” by engaging in his own self-immolation he will convince Song to stop immolating himself.

But what motivates Song to immolate himself to begin with? Will Sam’s “retaliatory” self-immolatation rid Song of those motivations? And what if, rather than stop his self-immolation, Song himself “retaliates” against Sam’s “retaliation” with intensified self-immolation? Here I think the Siamese-twins analogy with trade breaks down. Sam is economically attached not only to Song but to many other brothers and sisters – to Nigel, to Patricia, to Mario, to Juliette, to Juan, to Elsa, to Ludwig, to Neera, to Akihiro.

While Sam suffers when Song self-immolates, Sam must ask, first, if it is best that he do nothing in response. Perhaps his own body contains sufficient resources to ensure that, while he suffers from Song’s foolish self-destructive actions, he – Sam – would make himself even worse off from any retaliation. Sam must ask also how his connections with his other brothers and sisters affect the situation. If Sam “retaliates” against Song’s self-immolation with his own self-immolation, does Sam thereby lose the opportunity to cut his losses to a minimum by relying more heavily upon his other brothers and sisters? And, more generally, given the intricacies of the connections among all these multiple Siamese-twins, just how does Sam’s “retaliation” affect his other brothers and sisters – and how do these effects, in turn, affect Sam?

……

The Siamese-twins analogy breaks down even further when it is recognized that neither Sam nor Song is, in fact, an individual in the way that a Siamese twin is an individual. In reality, the entity that implements trade policy is the state; Sam is not Americans and only in the most naive view is seen as faithfully reflecting the ‘will’ or even the interests of the American people. Ditto for Song and the Chinese people. The “Sam” that implements trade policy often has interests directly hostile to the body-politic that Sam presents himself as representing and protecting. Again, ditto for Song.

…..

I remain pleased with my little attempt of seven years ago to deal with the question of the appropriateness of one government “retaliating” against the economic interventions of other governments. (Although addressed to the question of foreign-government subsidies, the logic of my argument applies also to foreign-government tariffs and import quotas.)

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Bonus Quotation of the Day…

by Don Boudreaux on September 18, 2018

in Myths and Fallacies, Trade

… is from page 345 of the 1990 Transaction Publishers reprint of W.H. Hutt‘s 1936 book, Economists and the Public:

We must probably wait for a more enlightened age before we can hope for the acceptance of the proposition that in the condition of natural and uncontrived scarcities we have the only conceivable acceptable criterion of distributive justice.

DBx: So true.

Alas, although 82 years have passed since these above words were first published, our age is no more obviously enlightened than was that of the 1930s. The president of the United States, many of his advisors, hordes of his supporters, and even legions of his political opponents continue to believe that the high prices and wages that result from artificially contrived scarcity – from scarcity made greater than it would be absent government-engineered contrivances – make society as a whole more prosperous. Intellectually and ethically, this error is on par with observing the pilfered loot possessed by a successful thief and concluding from this observation that society as a whole would be wealthier if everyone were a thief.

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This New York Times op-ed from last month – on trade with China – is well-described by its author’s last name. (I thank my Mercatus Center colleague Christine MacDaniel for reminding me of it.) A slice:

First, about 60 percent of China’s exports to the United States are produced at factories owned by non-Chinese companies. Many of them produce customized inputs for American manufacturers, such as computer routers, LED fixtures and boat motors. That means the tariffs imposed by the Trump administration that are directed at China actually affect many American (and European) companies that own factories in China.

These companies cannot immediately respond to tariffs by quickly moving their operations out of China. Instead, they will absorb the import tax or pass it along to American consumers in the form of higher prices. This is already happening: a 20 percent tariff on washing machines imposed in February was followed by a 16.4 percent spike in consumer prices for these products. So most of the revenue raised by the tariffs is coming out of the pockets of American consumers, not Chinese companies.

Pierre Lemieux, in this new EconLog post, warns against the misuse of accounting identities.

Also from Pierre Lemieux is the insightful exposé of the incredible economic ignorance of Trump’s chief trade advisor, Peter Navarro.

And here’s a third item from Pierre: the importance of allowing the pattern of consumer expenditures to guide production (and non-production).

John Brinkley describes Trump’s own ignorance and cluelessness about trade and trade negotiations.

Dan Mitchell makes an evidence-based case for the economic benefits of unilateral free trade.

My intrepid Mercatus Center colleague Veronique de Rugy writes that:

Social Security is in the hole. It’s time to stop digging. That means choosing from the many policy options available to Congress to reform the system: private accounts, privatization with a safety net for the poor, or an eligibility-age adjustment. Raising benefits, however, isn’t one of them.

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Rival Gang Violence Against Peaceful Traders

by Don Boudreaux on September 18, 2018

in Myths and Fallacies, Trade

Here’s a follow-up letter to Larry Clark:

Mr. Clark:

Thanks for your response to my earlier letter.

You’re correct to note that there’s a genuine difference between the case of our neighbors abroad being forcibly obstructed by their governments from trading with us, and our neighbors next door voluntarily choosing not to trade with us. But you leap too hastily to the conclusion that, therefore, Uncle Sam’s trade restrictions on Americans’ trade are justified by foreign-governments’ restrictions on their citizens’ trade.

To treat foreign-governments’ trade restrictions as illegitimate is to assume that foreign governments do not carry out the will of their citizens. This assumption is surely valid. But given this fact, we cannot then, with any legitimacy, casually assume that the U.S.  government carries out the will of the American people. I thus see no good reason to excuse Uncle Sam’s use of force to prevent us Americans from trading as we choose just because other governments use force to prevent non-Americans from trading as they choose.

We both agree that evil and economic harm would be unleashed if a violent gang were to take over our next-door neighbor’s home and obstructed our neighbors’ trade with us. But would our welfare improve if, in response, a rival gang took over our home and obstructed whatever trades each of us chooses to make with our next-door neighbors?

Unless you can honestly answer ‘yes’ to this question, you must at least concede that foreign-governments’ obstructions of their citizens’ trade are not an ipso facto justification for Uncle Sam’s obstructions of our trade.

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

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… is from page 6 of Deirdre McCloskey’s September 2018 manuscript “Raising Up Private Max U,” which is forthcoming in The Ethical Formation of Economists (Wilfred Dolfsma and Iona Negru, eds.):

The problem is that ethics in economics has been thoughtlessly attached to Rousseau’s notion of a general will.  Deep in left-wing thought and in a good deal of right-wing thought about the economy is the premise, as Isaiah Berlin once put it, that government can accomplish whatever it rationally proposes to do.  As has been often observed about leftists even as sweet as was John Rawls, the left has no theory of the behavior of the government.  It assumes that the government is a perfect expression of the will of The People.  So goes the welfare economics of Abraham Bergson and Paul Samuelson and the public finance of Richard Musgrave, and behind them the (mathematically incoherent) goal of the greatest happiness of the greatest number, to be achieved by wise utilitarians in government.  The liberals such as James Buchanan do have a theory of government, and a good deal of empirical work to back it up.  Liberalism has always been a theory against and therefore about coercion.  When my left-wing friends, of whom I have many, claim with a knowing smile that in admiring markets I am “ignoring power” I have a way of replying: no, dear, it is you who are ignoring power, the power of the monopoly of violence called a government.

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