This new post by Bob Higgs on the irrelevance of the “balance of payments” – and of the folly of worrying about a so-called “deficit” in it – should be read in full by Trumpkins and other protectionists. And then read again. And again. Carefully. And then read yet again.

Here’s a large slice:

Let us define the set of all human beings whose height is greater than 170 cm and less than 180 cm. Call this set A. Now let us collect data on all the dealings between members of set A and members of set B, which consists of all human beings whose height is less than or greater than those in set A. What economic significance can we ascribe to the aggregate of monetary flows between members of set A and members of set B? Correct answer: none. This aggregation of persons who trade with persons in the complementary set has no economic meaning; the sets are arbitrary so far as economic understanding is concerned. People—individuals, firms and other organizations, and governments—trade in order to improve their economic condition. Whether they trade with shorter or taller people or with people within a certain height range or outside this range has nothing to do with economics or human well-being. To draw up a balance of inter-set payments for set A and set B, or any given subset of B would serve no purpose. It would be a nonsensical exercise.

Now let us define the set of all human beings who reside within the boundaries of a certain nation-state, say, the United States of America. Call these people the elements of set P. Now collect data on all the dealings between members of set P and members of set Q, which consists of all human beings who reside outside the USA. What economic significance can we ascribe to the aggregate of monetary flows between members of set P and members of set Q? Correct answer: none. This aggregation of persons who trade with persons in the complementary set has no economic meaning; the sets are arbitrary so far as economic understanding is concerned. People—individuals, firms and other organizations, and governments—trade in order to improve their economic condition. Whether they trade with people inside or outside the USA has nothing to do with economics or human well-being. To draw up a balance of inter-set payments for set P and set Q, or any given subset of Q (e.g., residents of China or Mexico) would serve no intellectual purpose. It would be a nonsensical exercise.

Yet exactly such a nation-based “balance of international payments” accounting system has been constructed and “analyzed” for a very long time. In centuries past, when kings needed to accumulate gold and silver to pay mercenaries to fight their wars, they had a reason to accumulate such data and to promote policies (such as customs duties on imported goods) that would discourage imports, thereby keeping gold and silver from flowing out of the country in payment for the imports. This sort of “political arithmetic” eventually grew into the modern system of international balance of payments accounts (indeed, the entire system of national income and product accounts, as well). The old monarchical logic for the collection of such data has long since evaporated, however. Modern governments have other ways to organize and finance their wars.

Meanwhile, other interested parties discovered that they might use certain conditions, such as a so-called deficit in the balance of trade (the value of national imports of goods and services exceeds the value of national exports of goods and services) as rhetorical fodder to feed their politicking for the government to place greater tariffs (import taxes) on goods and services imported into the home country that compete for domestic sales with the goods offered for sale by domestic sellers. This gambit is nothing but a means of suppressing competition, an activity in which sellers unfortunately commonly engage, employing the government’s force in their quest if they can enlist it.

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… is from pages 13-14 of L. Albert Hahn’s July 1943 article, “Should Government Debt, Internally Held, Be Called a Debt at All?”, as this article is reprinted in Hahn’s excellent 1949 collection, The Economics of Illusion:

It is, of course, obvious that it is easier to pay interest and amortization on a government loan if it is possible to tax all those who possess the new assets which correspond with the new indebtedness of the government. But insofar as the necessary taxes are not levied on the “new capitalists” (as they can be only partly), the amounts have to be obtained through increased taxes on other members of the population. To these, it is entirely the same whether the amounts are finally channeled to an internal or an external creditor. If part of the population has to pay tribute, it suffers the same whether those to whom it is paying reside within or without the country.

DBx: If Smith is to be taxed to enable the government under which Smith lives to repay Jones, who holds a bond issued earlier by that government, Smith cares not whether Jones lives across the street from him or across the ocean. Smith will suffer economically, and the imposition of taxes that are the source of his suffering will distort his economic decision-making, causing economic damage also to others in the economy of which Smith is a part. (Whether or not this damage is economically justified depends, of course, on how this damage stacks up against whatever benefits, if any, were created by the government’s use of the funds that it earlier borrowed.)

If Smith, when the government debt was first incurred, personally agreed to be taxed later in order to repay the debt, that agreement would have arisen because Smith in some way benefitted from the debt. His being today obliged to repay would, in this case, not inflict any real damage on him. But if Smith had no real say in the matter when the debt was incurred, then to tax Smith to repay the debt is to force Smith to pay for the benefits of whoever it was who benefitted from the use of the borrowed funds. And, again, this reality doesn’t change one whit with the residency or citizenship either of the persons who benefitted from the government’s earlier expenditure of the borrowed funds, or of the persons currently holding the government bonds.

…..

Many years ago, George Selgin and I wrote this essay on Hahn’s economics.

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Here’s the latest in my on-going correspondence with Nolan McKinney, a fervent fan of Trump’s trade policies:

Mr. McKinney:

Yes, I saw that the Trump administration, in an effort to reduce America’s trade deficit with China, seems to have persuaded Beijing to arrange for the Chinese people to buy more American exports. But no, I neither regard this outcome as a “victory for America” nor “thank” Trump for arranging it.

You’ll pardon my repetition, but regardless of what you think of the U.S. trade deficit with the rest of the world, it’s absurd for you or anyone else to find meaning in the U.S. trade deficit with China, which is one among nearly two hundred nations with which Americans trade. Bilateral trade deficits and surpluses in a world of more than two countries are completely and unsalvageably meaningless. Therefore, it is foolish for the administration to base policy on these meaningless statistical artifacts.

In effect, Trump – in his ignorant effort to reduce America’s trade deficit with China – threatens to obstruct Americans’ purchases from China unless and until the Chinese buy more from Americans. I no more “thank” Trump for this effort than I would thank him were he – in an equally ignorant effort – to attempt to reduce my trade deficit with Home Depot by obstructing my purchases from that retailer until and unless Home Depot buys more from me. Indeed, just as I would summon the police to protect myself from such officious and destructive meddling in the latter case, I wish that I could summon the police to protect myself, and other Americans, from such officious and destructive meddling in the former case.

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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ECON 101 > ECON 999

by Don Boudreaux on May 20, 2018

in Economics

Here’s a letter to a young man who will embark this coming Fall upon his graduate studies in economics:

Mr. Cody Thompson

Mr. Thompson:

Thanks for your e-mail. You critically observe that on my blog I “seldom rise above Econ 101.” You’re correct, but my focus on economic fundamentals is by design.

I wholeheartedly agree that knowledge of advanced economics is valuable. But the economic knowledge ignored by the public, pundits, and politicians isn’t that which is found in ECON 999 but, instead, that which is found in ECON 101. Long before whatever truths that might be learned in ECON 999 become relevant, the insights and ‘way of thinking’ learned in ECON 101 must first be grasped.

Put differently, the flaws in real-world economic policies reflect not a naïve and uncritical application of the lessons of ECON 101 but, instead, a nearly complete ignorance of ECON 101 and, hence, a failure to apply its important lessons in the countless areas where they would do much good.

In this October 2015 blog post I explain in much more detail why I believe that the problem with economic policy is widespread failure to grasp, not ECON 999, but ECON 101.

Much good luck to you in your future studies.

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 4 of Steven Pinker’s 2018 book, Enlightenment Now:

More than ever, the ideals of reason, science, humanism, and progress need a wholehearted defense. We take its [the enlightenment’s] gifts for granted: newborns who will live more than eight decades, markets overflowing with food, clean water that appears with the flick of a finger and waste that disappears with another, pills that erase a painful infection, sons who are not sent off to war, daughters who can walk the streets in safety, critics of the powerful who are not jailed or shot, the world’s knowledge and culture available in a shirt pocket.

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In this podcast, Alberto Mingardi talks with the Wall Street Journal‘s Mary Kissel about the unfortunate rise of populism.

My intrepid Mercatus Center colleague Veronique de Rugy correctly argues that the GOP is no advocate of small and limited government.  A slice:

Led by a president who doesn’t appear to understand basic economics and who insists that the long-term drivers of America’s unsustainable national debt—Social Security and Medicare—can’t be touched, the mainstream GOP has proven that the grumbling about big government under Obama was mere political posturing. After years of swearing to repeal the Affordable Care Act, unified Republican power has instead come with a noticeable new taste for Medicaid expansion and support for other provisions of the law.

Republican apologists always seem to have an excuse for federal expansions on their watch. They argued, for instance, that Bush’s prescription drug subsidy for seniors was noble as well as politically savvy. But it’s getting government out of the equation that would actually make health care more affordable. Instead, Republicans delivered the biggest enlargement of the welfare state since the creation of Medicare in 1965.

My former GMU Econ colleague Omar Al-Ubaydli asks if attractive workers should subsidize unattractive ones.

Brittany Hunter warns of the unseen ill consequences of the greedy, grasping hand of Seattle’s city government.  A slice:

And while the city has yet to acknowledge the detrimental impact this minimum wage increase has already had, they are also ignoring the potential consequences of this new tax. But if the city is not careful in considering both the seen and the unseen repercussions of this new employment tax, they might soon find that all the job creators have had enough.

My old teacher Randy Holcombe reveals a hidden cost of inflation.

My GMU Econ colleague Alex Tabarrok rightly ridicules the magical thinking of too many people who see government as the ‘solution’ to problems, both real and imaginary.

Chris Edwards isn’t impressed with the TSA.

George Will applauds the good work being launched by Nicole Neily’s Speech First to thwart intolerance on American college campuses.

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… is from page 5 of the 2015 Matthew Dale translation of Weiying Zhang’s superb 2010 book, The Logic of the Market (original emphasis):

Today only one organization in the world legally does not have to make others happy but can be happy on its own. That organization is government. Government receives revenues through taxes. Taxes are forced, not voluntary, because the government has the power to collect taxes forcefully. Even if in theory we require government to serve the people and to provide public goods to citizens, we have no way of guaranteeing that the taxes collected by the government are not higher than the value of the public goods provided while serving the people. In fact, taxes collected by government often exceed the value of services provided.

DBx: A common response to the argument above is that majoritarian democracy generally ensures against such abuses by government. Those who offer this response have only a third-grader’s understanding of democracy – an understanding that reflects complete ignorance of public choice and social-choice theory. This understanding also reflects an unjustified romance about the changeability of human nature – namely, the romantic myth that election to political office typically transforms those so elected into public-spirited, and highly informed, stewards of the public welfare.

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A Protectionist is Someone Who…

by Don Boudreaux on May 18, 2018

in A Protectionist is..., Trade

… would, if nature were a conscious and acting entity, accuse nature of unfairly inflicting economic damage on the people of a country if and whenever the rate at which natural disasters strike that country falls.

When the rate of natural disasters falls, the protectionist would see, correctly, the resulting loss of jobs in construction, home repair, and emergency medical services.  From this vision the protectionist would conclude, incorrectly, that nature is inflicting upon the country decreased overall employment and reduced economic well-being.  Businesses and workers whose livelihoods are threatened by the reduced incidence of natural disasters would accuse nature of unfairly robbing them of what is theirs by right – namely, the presumed right to have consumers purchase from them some minimum amount of goods and services.

And when nature turns a deaf ear to those who demand that she resume her previous, higher rate of visiting destruction upon the country, the whining producers who lose business because of the fall in the rate of natural disasters will turn to government to demand that it pursue policies that restore their previous levels of business.

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Here’s a letter to the Wall Street Journal:

The furor over Chinese telecom company ZTE is a maze of confusions. Those who seek U.S. restrictions on Americans’ dealings with this company weaken their case both by loading it with ‘everything-including-the-kitchen-sink’ accusations, and by poor economic analysis. An example is the case against ZTE offered by Congressman Dutch Ruppersberger (D-MD) and CNN’s Mike Rogers (“Trump Shouldn’t Give ZTE a Pass,” May 18).

Among the offenses they accuse ZTE of committing are ones that, if true, are serious and warrant a response. An example is ZTE’s alleged theft of intellectual property. But other alleged offenses are no offenses at all, at least not against Americans. The prime example here is ZTE’s receipt of subsidies from Beijing. By making telecom equipment less expensive for Americans to purchase, these subsidies help, not hurt, Americans as a whole.

Moreover, these subsidies hurt, not help, the Chinese people as a whole. They do so by directing resources in China away from their most-productive uses into less-productive uses. That the likes of Messrs. Ruppersberger and Rogers worry that Beijing’s use of subsidies will artificially strengthen the Chinese economically reveals these authors’ apparent, if wholly wrongheaded, belief that economies perform better when directed by government officials than by market forces.

Messrs. Ruppersberger’s and Rogers’s poor grasp of economics is further exposed when they leap from the observation that subsidies enable Chinese telecom firms to produce “far more equipment at cheaper prices than their foreign competitors” to the conclusion that these subsides will lead to “higher prices for U.S. consumers.” Hunh?? Beijing’s subsidies give Chinese telecom exports an artificial advantage in the U.S. market only by lowering the prices that Americans pay for telecom products. If Beijing’s subsidies artificially raise the prices of telecom products, you can be sure that American rivals of Chinese producers would be cheering rather than complaining.

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

……

Let me anticipate an objection: some readers will allege that what Messrs. Ruppersberger and Rogers are referring to, when then refer to higher prices, are higher monopoly prices in the future that are destined to result from today’s lower prices made possible only by Beijing’s subsidies.

I object to this objection.  Here are three of my reasons.

First, no mention, or even allusion, is made by the authors to predatory pricing.

Second, predatory pricing today that leads to monopoly pricing tomorrow is often alleged, but – like Nessie in the Loch Ness – is never really seen.  Also like Nessie, when serious, scientific analysis is used to explore the case for the existence of this mysterious monster, that case crumbles into a pile of illusions, inconsistencies, impossibilities, and fabulous improbabilities.

Third, as implied in my letter above, any artificial monopoly that Beijing might successfully engineer for some of its exporters makes other Chinese producers artificially more subject to competition.  Overall, the Chinese economy is weakened because the favored firms are expanded to inefficient sizes while some other Chinese firms are prevented from expanding to efficient sizes.  Beijing-engineered inefficiencies abound throughout the economy.  And if the subsidy-induced expansion of some Chinese firms might possibly lead to them enjoying future monopoly power, then the accompanying subsidy-induced stunting of some other Chinese firms might possibly lead to their ultimate destruction by foreign competition and, hence, to foreign competitors enjoying monopoly power in those other Chinese markets.

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FEECon will soon take place in Atlanta.  (I’ll be there June 8th-10th.)

My intrepid Mercatus Center colleague Veronique de Rugy accurately describes Seattle’s worker-head tax as “idiotic.”  A slice:

But those who constantly lust over other people’s money have no shame. A union-backed activist group named Working Washington immediately called for — wait for it — Amazon to be charged with a felony for the crime of “intimidating a public servant.” Simply questioning whether its business expansion in Seattle would be a good idea in the face of an arbitrary and substantial increase of its labor costs was the alleged crime.

Of course, what Amazon did is no different from what many taxpayers do when taxes increase to cover poor money management. I, for instance, am in the process of deciding whether I really want to continue offering my home through Airbnb now that Arlington County, Virginia, requires a business license to rent a room in one’s own home, a 7.25 percent tax and filing a monthly tax return for the unit.

On Trump’s efforts to drain the swamp, Bruce Yandle worries that for every drop drained out two new drops are added in.  Here’s Bruce’s opening:

President Trump’s promise to drain the Washington swamp of excessive command-and-control, top-down regulation is delivering an all too familiar outcome: an even murkier swamp that cartelizes select industries worldwide by way of command-and-control, top-down regulation.

David Henderson gives Little Pink House a high grade.

The dominant force in politicizing higher eduction in the United States is U.S. government involvement in it.

Here’s a summary by Alex Nowrasteh of the state of immigration enforcement in the U.S.

Robby Soave points us to a new study that finds that irritation with political correctness played a role in helping Trump win the 2016 presidential election.

There are indeed a staggering number of losers from Trump’s tariffs – indeed, even more than showed up recently on Capitol Hill.

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