More Vérité from Veronique

by Don Boudreaux on May 7, 2019

in Crony Capitalism, Subsidies, Trade

In tomorrow’s (May 8th’s) New York Times, my intrepid Mercatus Center colleague Veronique de Rugy eloquently blasts some of the many canards used to ‘justify’ the existence of that great geyser of cronyism, the U.S. Export-Import Bank. A slice:

For nearly four years the Senate leadership has blocked confirmation votes to fill the vacancies on Ex-Im’s board of directors, depriving it of the quorum needed to authorize deals over $10 million. Sadly, Senate Republicans, led by Mitch McConnell and with the help of nearly all Democrats, are expected to end their blockage this week by confirming Kimberly Reed as the head of the bank and two other nominees to the board.

As a candidate Mr. Trump was anti-Ex-Im. Then as president he started calling the bank “a very good thing.” Supporters claim that money funneled through Ex-Im expands exports, small businesses and jobs. Without it, they say, America’s global “competitiveness” would be dealt a blow.

Critics like myself say that Ex-Im’s handouts amount to corporate welfare — often toward large companies like General Electric and Caterpillar — that does not meaningfully increase overall exports. This agency inflates the profits of the politically connected on the taxpayer’s dime. It also artificially grants an edge to foreign companies against which unsubsidized American businesses have to compete.

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100-1≠60 and 60+1≠100

by Don Boudreaux on May 7, 2019

in Myths and Fallacies, Trade

Here’s a letter to a typical politician, U.S. Senator Marco Rubio (R-FL):

Sen. Rubio:

I just learned at World Trade Online of this astonishing March statement of yours: “Washington’s willingness to sacrifice entire domestic industries and local production just to shave pennies off the costs that American consumers might pay for products is one of the main reasons why Donald Trump is president today.”

You need tutoring in both economics and arithmetic.

Central to your argument is your suggestion that when we Americans buy lower-priced imports our total savings is only very modest – so modest that, you imply, Americans on net benefit from tariffs which lead us to purchase fewer imports.

Well now.

Economics demonstrates that, except under the rarest of circumstances, the gains that free trade bestows upon the citizens of any country are greater than any accompanying costs.

But you can be excused for flubbing economics.

You cannot, however, be excused for flubbing arithmetic. And arithmetic is clear that if, as you suggest, the total amount of money that we Americans save by purchasing imports is very small, then it follows that the total amount of additional money that we Americans, when prodded by tariffs, will spend on American-made products will also be very small.

Put differently, you argue, in effect, that 100-1=60 and that 60+1=100. You will note that this arithmetic is wrong. And I note that your analysis of trade is just as wrong.

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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Here’s a letter to Mr. Eddie Ng:

Mr. Ng:

Thanks for your e-mail.

You find my colleague Dick Wagner’s case against the minimum wage “weak.” Without offering a reason for your objection to his argument, you ask why you should “believe that the minimum wage causes unemployment.”

I urge you to explore the vast empirical literature on the actual consequences of minimum wages. You’ll find there a great deal of evidence that minimum wages reduce the employment prospects of low-skilled workers. This evidence isn’t unanimous, but it is very hefty – in my view overwhelming. (Note, by the way, that job destruction is only one consequence of minimum wages. Other ill consequences include reduced fringe benefits, reduced hours, and worsened work condition.)

But even apart from the evidence, let me offer you one reason to be suspicious of minimum wages: they are akin to a poll tax.

Those who impose a poll tax demand that persons wishing to vote bring to polling places a minimum amount of value, in the form of money, before being allowed to vote. Likewise, those who impose a minimum wage demand that persons wishing to work bring to job sites a minimum amount of value, in the form of hourly productivity, before being allowed to work.

Just as a poll tax prevents people with very few dollars from voting, a minimum wage prevents people with very few skills from working. And so just as a poll tax reserves access to ballot boxes to people with more money, a minimum wage reserves access to jobs to people with more skills.

Only if you can find your way to suppose that poll taxes have no negative consequences on voting should you continue to suppose that minimum wages have no negative consequences on employment.

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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In my most-recent column for AIER, I emphasize the importance of the Hayekian distinction between “organizations” and “orders.” (In econo-jargon, only the former has an “objective function”; the latter – contrary to a nearly universal presumption – does not.)

A slice:

Wikipedia reports that Aristotle, in his Nicomachean Ethics, defined “the word ‘economy’ as ‘the art of household management’.” Each household can be run well or poorly; when run well, it is run “economically.” The household’s means — its space, its furniture, its appliances, its inventories of food and drink, its time — are used to promote as many as possible of the household’s ends.

Likewise for you as an individual. You marshal your means to fulfill as many as possible of your ends. So too for a business. Each business uses its capital and inputs to earn profits.

And to marshal means in a manner that fulfills as many as possible ends requires not only planning, but also conscious effort to execute the plan.

In sharp contrast to an individual, a household, and an organization such as a business firm, what is today called an “economy” has no purposes. The economy has no hierarchy of goals that it or its participants pursue. Each American, each American household, and each American firm (for-profit and not-for-profit, and governmental) has a hierarchy of goals that it pursues, and each does so by acting within the American — actually, within the global — economy. But these many attempts to fulfill individual goals are no part of a collective effort to fulfill higher goals.

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… is from page 115 of the 2019 Mercatus Center edition of my GMU Econ colleague Richard Wagner’s excellent 1989 book, To Promote the General Welfare:

Most low-wage jobs are initial and not terminal employments. And there would be many more such jobs if they were not prevented by minimum wage legislation. Such jobs are often entry points into the world of work. As people accumulate the skills and traits that are required for successful employment, they typically move on to higher paying jobs. Being an usher in a theater before that type of work was largely precluded by minimum wage legislation may have been the first step into the world of work.

If entry-level jobs are foreclosed, however, an opportunity for the creation of skills and traits is also foreclosed. Without the opportunities for personal development that are provided by such entry-level jobs as ushering in theaters, the chance or the opportunity to move into higher paying jobs is diminished. Work experiences contribute to a person’s human capital and thereby increase earnings. In the absence of the experience afforded by entry-level employment that might pay less than the minimum wage, less human capital will be accumulated, which in turn will lead to lower lifetime earnings.

DBx: Advocates of minimum wages – in addition to stubbornly refusing to recognize that raising employers’ costs of using the input called “low-skilled labor” incites employers to use less of this particular input – ignore the damage that this restrictionist policy has on the human capital and lifetime earnings of workers whose entry into the labor force is either delay or altogether blocked.

Far from helping to reduce poverty and income inequality, minimum-wage legislation perpetuate poverty and inequality.

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Here’s a letter to Cafe Hayek reader Andrew Waggoner:

Mr. Waggoner:

Thanks for sending Robert Atkinson’s essay, one that you describe as making “a formidable case that we Americans use tariffs to protect our economy from China’s unfair practices.”

I don’t see matters as you – and Atkinson – see them.

China’s trade-rules violations inflict huge costs directly on the Chinese themselves. Beijing’s subsidies to Chinese producers divert resources away from those resources’ most-productive uses in China and toward Chinese firms that use those resources less productively. The same destructive diversion of resources is wrought by Beijing’s special-interest tax breaks. And note that if these subsidies and tax breaks encourage Chinese firms to lower the prices of their exports, we Americans benefit no less than we benefit when Chinese producers cut their prices as a result of their adoption of cost-saving means of production.

The Chinese are harmed in the long-run even by stealing intellectual property and by any biases that Chinese courts exhibit against non-Chinese firms. The reason is that these practices are in-kind taxes on foreign firms operating in China: the higher these taxes, the fewer and less extensive are foreign-firms’ operations in China. China’s economy is thereby denied the competition, the capital, and additional goods and services – not to mention the additional innovation – that would otherwise occur in that country.

Finally, on this issue of IP theft by the Chinese: as a problem it’s overblown. American protectionists cynically exaggerate and demagogue this problem in order to stir up support for their cronyist trade restrictions – restrictions that are poor tools for discouraging any such theft that does occur. Last month, my Mercatus Center colleague Dan Griswold and I wrote a short paper on this matter titled “How the United States Should Respond to China’s Intellectual Property Practices.”

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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Bastiat Matters – in Both Theory and Practice

by Don Boudreaux on May 6, 2019

in Economics

This month’s Liberty Matters features a superb lead essay by Liberty Fund’s David Hart on Frederic Bastiat’s under-appreciated prowess as an economic theorist. David’s essay is inspired by the forthcoming release of a new edition of Bastiat’s Economic Harmonies, which has been edited by David.

One response essay is written by me; a second will soon appear from Joe Salerno, and then a third from Jörg Guido Hülsmann. These responses – to be followed later by an on-line discussion – appear after David’s lead essay.

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Some Links

by Don Boudreaux on May 6, 2019

in Hayek, Politics, The Profit Motive, Trade

Jonah Goldberg wisely counsels conservatives to re-read Hayek.

Writing in the Washington Post, Tyler Cowen celebrates the genuine progressiveness of commerce. A slice:

The larger the business, the more tolerant the institution is likely to be of employee and customer personal preferences. A local baker might refuse to make a wedding cake for a gay couple for religious reasons, but Sara Lee, which tries to build very broadly based national markets for its products, is keen on selling cakes to everyone. The bigger companies need to protect their broader reputations and recruit large numbers of talented workers, including from minority groups. They can’t survive and grow just by cultivating a few narrow networks as either their workers or customers.

Claude Barfield writes about the appalling politics of trade – of the utter ignorance of both Trump and Sanders, and of the cowardice of Biden.

Jeffrey Tucker explains that tariffs emphatically do not promote prosperity.

Could an individualistic world also be a more altruistic world?

Randy Holcombe laments the real need for good economists to again teach comparative economic systems.

Alberto Mingardi reflects on Thatcherism at 40.

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Here’s a letter to Duquesne University law professor Bruce Ledewitz:

Prof. Ledewitz:

Thanks much for your e-mail in response to my letter in today’s New York Times Book Review.

Your key paragraph is this one:

But it is your larger point about the lack of existential crisis I don’t understand. I have seen maps that show that rising sea levels eventually flood large portions of Florida. That seems to me to represent a catastrophe that cannot be mitigated–the same with predictions that humans might eventually have to leave the southwest U.S.  Harms like that have to be prevented at all costs, if they can be, no? Obviously, there is something here that you deny, but I don’t know what it is.

It’s not so much what I deny as what too many other people ignore. Too many people ignore the fact that we humans have long coped with crises, including resource depletion and climate change (such as the arrival in the 13th century of the little ice age and its passing in the 19th). And for the past two-hundred or so years, especially in market-oriented societies, our capacity to protect ourselves from the many dangers that nature inflicts on us has been stupendous – so much so that we take for granted today the countless ways that markets cleanse our environment.

By our current standards, most of these ways are mundane. They include electric lighting and stoves that reduce the particulate matter in our homes; inexpensive indoor plumbing, soap, refrigeration, and canning – and antibiotics – that protect us from bacteria that once mowed down our ancestors in great numbers; and internal-combustion engines the emissions of which do not foul our streets and walkways as did the maggot-attracting emissions of horses and other draught animals.

The point of my letter is to draw attention to the countless ways, almost all overlooked, in which our environment is cleaned by capitalism. And so when you write that threats of the sort that you highlight “have to be prevented at all costs,” recognize that among those costs is the potential destruction of the global system of commerce and industry that has made our lives today cleaner and safer than they’ve ever before been.

I worry, very much, that failure to recognize the many ways that capitalism cleanses our environment will lead us to pay a price far too high in our attempt to mitigate some other ways in which capitalism damages our environment.

Put differently, I fear that a far more likely existential crisis confronts us from the severe restrictions on capitalist innovation and reach – restrictions of the sort advocated by Bill McKibben – than from rising sea levels.

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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Quotation of the Day…

by Don Boudreaux on May 6, 2019

in Philosophy of Freedom

… is from page 8 of Dan Moller’s 2019 book, Governing Least:

Helping the needy is a noble cause, but one we should pursue with reason and persuasion, not state-sanctioned coercion.

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