Cafe Hayek

What the founders understood

Russell Roberts

Here is some wisdom from John Baden occasioned by the 4th of July. Here's my favorite part:

The American Constitution fostered a productive, progressive society unburdened by an official, governmentally sanctioned religion. While some believe our Founders were divinely inspired, there is no test for this claim. However, were I to attribute one secular document with a divine source, it would be the Constitution with our Bill of Rights. Somehow, our Founders got design right.

Their work exemplified Enlightenment thinking and displayed heavy emphasis on reason and science. Our Founders well understood the potential for plunder and worked to minimize it. Their task was to create institutions strong enough to protect citizens in their person and property, while constraining politicians and special interests from exploiting and controlling others.

While perfection eluded our Founders due to the compromises necessary for ratification (consider neglect of women, slaves, and Indians), it was a marvelous beginning. They limited government’s ability to transfer wealth and opportunities; otherwise, as is Europe, benefits would flow to the powerful and well connected. Here, individuals had incentives to improve their lot by being productive rather than predatory. Americans’ surest path to self-improvement came from moving human and natural resources to ever-higher values. As a result of our focus on productivity not plunder, we became rich beyond belief.

Today, our challenge is not wealth creation, but rather living well, ethically, and with sensitivity to others and our environment. This is a great accomplishment, one really quite amazing—and under appreciated.

Leamer on outsourcing and competition

Russell Roberts

In the latest EconTalk episode, I talk with Ed Leamer about outsourcing, globalization and a host of related issues. One issue that comes up is the nature of competition when goods are heterogeneous. Ed argues that in such cases, supply and demand is the wrong way to look at such products. There isn't going to be a single price and deviations from "the" price will be tolerated because of the uniqueness of each transaction. We spar over it a bit. Here's my attempt to make the case for markets even when every transaction is unique. Graduate students in economics will want to look at Rosen's work on hedonics.

EDIT: When I said "make the case for markets" above, I meant "make the case for using supply and demand to understand pricing" and to treat such markets as competitive even though each transaction is unique. Leamer implies, if I understood him correctly in the podcast, that heterogeneity and long-term relationships mean that prices aren't determined by competition and supply and demand in such situations.

Unwholesome Antitrust

Don Boudreaux

What is it with antitrust authorities and supermarket mergers?  Here's a letter that I sent today to the Wall Street Journal:

Arnie Celnicker argues that the Federal Trade Commmision's challenge of Whole Food's merger with Wild Oats is justified by various "market nuances" (Letters, July 7).  Among these is the fact that "financial markets have deprived Wild Oats of the capital to compete head on with Whole Foods" and the fact that consumer demand for organic foods is skyrocketing.

How in the name of free-range chicken do these facts justify government blocking this merger?  Precisely because consumers now want more and more organic products, financial markets have every incentive to invest in firms catering to this growing market if these firms are well-managed.  Wild Oats' inability to get adequate private financing in this growing market is strong evidence that its assets now are poorly managed.  It's only natural that Whole Foods spots and seizes this opportunity to use these assets more effectively at meeting consumer demands.  The FTC's interference - an unwholesome additive to the market - jeopardizes consumer well-being.

Sincerely,
Donald J. Boudreaux

Easterly vs. Bono

Don Boudreaux

Bill Easterly is always worth reading.  Here are a couple of paragraphs from his op-ed that appears in today's edition of the Los Angeles Times:

In truth, Africans are and will be escaping poverty the same way everybody else did: through the efforts of resourceful entrepreneurs, democratic reformers and ordinary citizens at home, not through PR extravaganzas of ill-informed outsiders.

The real Africa needs increased trade from the West more than it needs more aid handouts. A respected Ugandan journalist, Andrew Mwenda, made this point at a recent African conference despite the fact that the world's most famous celebrity activist — Bono — was attempting to shout him down. Mwenda was suffering from too much reality for Bono's taste: "What man or nation has ever become rich by holding out a begging bowl?" asked Mwenda.

By the way, my wife's work in Africa supports Easterly's thesis.

Unclean Politics Means Unclean Energy

Don Boudreaux

In today's Washington Times, my friend and co-blogger at Market Correction, Andy Morriss, nicely exposes the foolishness of the misnamed "Clean Energy Act of 2007" (which the U.S. Senate recently approved).  Here are Andy's final few paragraphs.

There is a way to improve energy security: unleash entrepreneurs. Refiners have been solving America"s energy problems since the start of the 20th century. When the U.S. faced a major gasoline shortage in 1910, entrepreneurs revolutionized refining technology and doubled gasoline yields. For the last 30 years, they"ve been boosting output from refineries, making it possible for our total capacity to rise even as older, less efficient refineries were closed.

In short, American refiners have regularly increased the quantity and quality of gasoline from each barrel of crude, and done it without Congress" advice.

If we want to increase our energy security, we"ll stop changing the rules every time a politician needs an issue for his next campaign ad. Refineries, pipelines, and oil fields are all multibillion-dollar investments that take years to earn a return. The constant shifting of government rules undermines the certainty investors need before making such a large-scale capital commitment.

If we want to make America more secure, decrease gasoline prices, have cleaner fuels, and increase the reliability of supplies, we need to get the government out of the way of the entrepreneurs who can deliver those things.

King George "Lou Dobbs" III

Don Boudreaux

Today, the Washington Times appropriately reprints the Declaration of Independence.  It is truly a beautiful document.

I sent the following letter in response:

Thank you for reprinting the Declaration of Independence (July 4).  I encourage especially you, with your hostility to immigration, to read it carefully, noting that Jefferson explicitly condemned King George III's restrictive immigration policy: "He has endeavoured to prevent the population of these states; for that purpose obstructing the laws for naturalization of foreigners; refusing to pass others to encourage their migrations hither."

Back then when America covered vastly fewer square miles than it covers today, when each parcel of land fed many fewer mouths than land feeds today, when the amount of capital per worker was a tiny fraction of what it is now, and when Americans' standard of living was far lower than today's standard, America's wise founders nevertheless wanted more open immigration.

Why is it that today, the wealthiest time in our history, so many Americans fear immigration?  Why do so few Americans today share Jefferson's understanding that more free people in America mean an even more prosperous America?

Sincerely,
Donald J. Boudreaux

It is worth pointing out, again and again, that America has never been better able than it is today to absorb immigrants.

The world isn't flat

Russell Roberts

My next EconTalk guest will be Ed Leamer. The podcast should be released on Monday. It's based on this extraordinary essay on trade issues he wrote for the Journal of Economic Literature. It's supposed to be a review of The World is Flat by Thomas Friedman. It's really a phenomenal introduction to outsourcing, global income inequality, poverty, trade flows, the post-industrial job market and more. It's funny and it's full of thought-provoking ideas. Most of it is non-technical and you can just skip that stuff if you want.

Munger and more Munger

Russell Roberts

Here is Mike Munger in the latest EconTalk episode, talking about his EconLib essay on recycling. Mike argues that it's easy to tell garbage from a resource. A resource has a positive value--someone is willing to pay you to take it off your hands. Garbage has a negative value--you have to pay someone to take it off your hands. With a few caveats, it pretty much sums up the problem and virtue of recycling. Some stuff is worth recycling. Some stuff isn't. In the podcast, we talk about why we feel virtuous recycling stuff that is garbage. But not all garbage produces this warm glow. And Mike has lots of interesting things to say about some of the stranger behaviors in the world of recycling.

Where Externalities Lie

Don Boudreaux

Here's a letter that I sent today to the Wall Street Journal.

To the Editor:

Like many others, Professor Hendrik Van den Berg insists that "we need to raise the price of gasoline by introducing a tax that reflects the congestion, environmental and national security costs of oil" (Letters, July 3).  I disagree.

First, government already taxes oil production and gasoline.  How does Prof. Van den Berg know that the current level of taxation is inadequate?  Second, government itself is a steamy swamp of negative externalities.  Not only do politicians and bureaucrats spend other people's money, they do so overwhelmingly while under the influence of special-interest groups.  The only tax that we should raise is one that increases the cost of using government.

Sincerely,
Donald J. Boudreaux

I am consistently amazed at the way so many persons -- including (especially?) economists -- cleverly identify real or imagined externalities in private markets and then propose political "solutions" for these alleged problems as if the government officials who will design and implement these "solutions" are wise, well-informed, and pure of motive.

Do Windfall-Profits Taxes Apply to Politicians?

Don Boudreaux

Today's New York Times reports on Sen. Barack Obama's record-breaking fund-raising spree to finance his bid for the Presidency.  Last quarter Sen. Obama raised, as the Times puts it, "a whopping $31 million."

These funds, of course, are all voluntarily contributed.  The fact that I, personally, do not care for much of what Sen. Obama espouses is irrelevant: lots of people like what he says.  They like it enough to contribute to his campaign.  The result, designed by no one, is a huge campaign chest for Sen. Obama.  He will be well-financed to pursue his ambition.  (In my opinion, this ambition is an especially greedy and venal one, but that's just my opinion.)

In May, however, the very same Sen. Obama called for Senate hearings into allegedly excessive pay for CEOs of corporations.

The Senator is either ethically inconsistent or intellectually inconsistent (or both).  The pay of private-sector CEOs is determined by market forces.  No one -- absolutely not a soul -- is forced to contribute money to fund CEO salaries.  Those who pay such salaries do so voluntarily.

It's the same with those who contribute to political campaigns such as Sen. Obama's.  Everyone who does so, does so voluntarily.  I wonder how Sen. Obama would react to someone suggesting that his bulging campaign chest is the result of "greed" and behind-closed-doors deviousness by him and his campaign staff.  I wonder if he thinks that government should hold hearings to "investigate" the unprecedented ummph and possible anti-social consequences of his fund-raising success?

And if he fails to win his bid for the Presidency, might we conclude that he, like a highly paid CEO who fails to improve the company's fortunes, is really undeserving of the largess bestowed upon him?

(I thank Dimitri Vassilaros, columnist for the Pittsburgh Tribune-Review, for the title of this post.)

Chinese Atrocity

Don Boudreaux

One of the great mistakes committed by many pro-liberty enthusiasts in America is to forget how free we Americans still are compared to persons elsewhere, especially to persons outside of western Europe and the English-speaking world.  Yes, we Americans are not as free as we should be; our government insults and harasses us continually with pernicious regulations and taxes; our "leaders" typically are venal liars, with no more personal integrity than ordinary pick-pockets -- they would be clowns worthy of belly-laughs if their access to power over us were only pretend.

And, yes, the "war on terror" has further diminished our freedoms -- just as any "war" on an abstraction will inevitably create excessive power for the state.

But compared to people in much of the world Americans remain free.  I can write this blog and say pretty much whatever I wish to say.  I might be called nasty names by commentors, friendly critics might express their constructive criticisms, but I never worry about being arrested, fined, or imprisoned.  I can call George Bush whatever names I want; I can accuse the Congress or the Supreme Court or the FDA of stupidity, cupidity, or even treachery, and then sleep like a baby at night without fear of a midnight pounding on my door.

I want to be more free -- much more free.  But at the same time I recognize that the fate being suffered now by these four innocent young men in China is a fate that I and other Americans need not fear.

The goons who run the government in Beijing imprison people merely for writing publicly about democracy and other alternatives to the centralized behemoth bequeathed to China by Chairman Mao.  The Chinese government prevents people merely from expressing opinions that, in the view of the government, might "subvert state power."

These political prisoners should be freed immediately.  And those of us who live in freer societies should continue to press for all of our rights, and not forget or to take for granted the ones that we do possess.  And we should condemn the greater assaults on freedom committed against our fellow human beings in other, less-free parts of the world.

What Do Investors Know?

Don Boudreaux

Here's a letter that I sent yesterday to the Washington Post in response to this report on Congress's refusal to renew the President's fast-track authority to negotiate trade agreements.

Dear Editor:

It is unfortunate that Congress refuses to renew the President's fast-track trade authority ("End Nears for Era of Presidential Trade Authority," June 30).   And it is insulting for protectionists, such as Kevin Kearns, to justify this refusal with the argument that freer trade has encouraged "footloose multinational companies" to flee the U.S. for "penny-wage, regulation-free foreign production sites like Mexico and China."

The facts are difficult to square with this claim.  In 2006, per capita foreign direct investment in Mexico was $174; in the U.S. it was $612 - three and a half times as much as in Mexico.  2006 figures for China are unavailable, but in 2005 per capita FDI in that country was just shy of $60 - less than one-tenth of 2006 per capita FDI for the U.S.

Sincerely,
Donald J. Boudreaux
George Mason University

Note also this fact reported by UNCTAD (which I did not have room to include in my letter):

Two-thirds of FDI flows in 2006, at US$ 800 billion, were to developed countries (up from three-fifths in 2005). This represents an exceptional 48 per cent estimated increase over the US$ 542 billion flows into developed countries in 2005.

If high-wage, developed countries are less attractive places to earn profits than are low-wage, developing countries, investors worldwide have yet to learn this alleged fact.

Mario Rizzo on Income Differences

Don Boudreaux

One of my former professors at NYU, Mario Rizzo, has this outstanding letter published in The Financial Times:

Why should we care about sharing out prosperity?

By Mario J Rizzo

Published: June 28 2007 03:00 | Last updated: June 28 2007 03:00

From Prof Mario J. Rizzo.

Sir, Lawrence Summers' article "Harness market forces to share prosperity" (June 25), on reducing income inequality, leaves several critical questions unanswered.

First, why should we care that income inequality is increasing? Was the previous distribution of income more just, simply because it was more nearly equal? Second, neither Professor Summers nor anyone else has a comprehensive understanding of the causes of recent trends in income distribution. In general, it is a bad idea to look for solutions to a "problem" whose causes we do not understand. Third, the whole idea of "sharing prosperity" seems to imply that prosperity is some kind of aggregate to which we all have some claim, much like members of a family. What justifies looking at society as a family? If it is, Prof Summers can just send me a monthly cheque without the need for legislation.

Finally, Prof Summers uses a shameful rhetorical trick. By suggesting a "solution" that steers a middle ground between excessive regulation and doing nothing (as if we do not redistribute income now), he appears to be very reasonable. Perhaps it is even more reasonable, however, to think through the rhetoric of increased redistribution before inventing new policies.

Mario J. Rizzo,

Department of Economics,
New York University,
New York, NY 10012, US

Delusional Young People

Don Boudreaux

I love this post from Liberty Belles.

An Anecdote on Health Care

Don Boudreaux

My family and I are in France.  Yesterday we visited, near Arles, the parents of some friends.  These lovely people have a newly acquired dog, Tor.  They came to own Tor because of the unfortunate death of their 60-year-old neighbor, whose dog Tor was.

Conversation at lunch revealed that the neighbor, who had a history of heart trouble, suffered severe chest pains a few weeks ago.  He wisely went to the hospital seeking treatment.  He was told that there was no space available for him.  He was advised to go home and call back later to see if a room might have become available.  He did so, but was told repeatedly that the hospital remained full to capacity.  Several days later this man died at home, never having received hospital treatment.

This incident, while true, is also an anecdote.  It doesn't prove anything about the merits or demerits of France's universal-health-care system compared to those of the (still somewhat) private system in the U.S.  But this sad event does reveal that merely declaring, statutorily, that every citizen has a right to health care, or that health care is "free" to every citizen, does not make health care available to all or "free."

Secular priests performing ceremonies, beneath marble domes, in which health-care is declared "a universal right" do not, in fact, perform the miracle of making health-care universally available.

Anti-Antitrust

Don Boudreaux

Chicago Tribune columnist Steve Chapman is one of the very best at his craft.  He is consistently interesting and on-target correct.

Today he tackles the ludicrous antitrust action by Uncle Sam against the proposed merger of satellite radio suppliers XM and Sirius, and the similar action against the proposed merger of Whole Foods and Wild Oats.

Here are some snippets:

In both cases, the rationale is that fewer companies will mean fewer choices and higher prices. But consumers who want what these firms provide have more options than the Milky Way has stars.

Organic food consumers would not be the suffering captives of this new company. Every grocery store has a raft of organic offerings, and chains from Wal-Mart to Trader Joe's are fighting to get their share of sales. If the bigger Whole Foods tries price-gouging, customers can easily find other sources for what they want - from farmers markets to online suppliers.

The key government error is defining the market as a narrow sector isolated from other sectors that provide reasonable substitutes. That same mistake explains the FCC chairman's aversion to the satellite radio deal.

And another snippet from the same column, one that refers appropriately to the 1990s-era fear that Microsoft would "conquer" the market for computer software:

Meanwhile, other companies, notably Google, have trounced the Big Meanie in other areas. Over the last decade, says Thomas Hazlett, a professor of law and economics at George Mason University, "Microsoft has seen its market position erode, and it has virtually nothing to do with the antitrust case."

Antitrust was born in late 19th-century America as a devious means of protecting politically influential producers from the competition posed by new, entrepreneurial firms.  It was never economically sensible.  And it is not so today.

A Dangerous Financial Product

Don Boudreaux

Here's a letter that I sent yesterday in response to an e-mail that I received:

22 June 2007

Ms. Clara Perez
www.democracyjournal.org

Dear Ms. Perez:

Thanks for your e-mail alerting me to Presidential-hopeful John Edwards's proposal to create "a regulatory commission to protect consumers from dangerous financial products."

If such a commission does its job, I suggest that the first dangerous financial product that it attacks be Social Security.  Not only are Social Security's returns lousy; not only are its "customers" never vested their "contributions"; not only does the institution providing it have no sound plan to keep it solvent; not only does this institution intentionally mislead its clients about its insolvency (witness its discussions of the illusory "trust fund") - but its "customers" are forced to buy it. That is a dangerous financial product!

Sincerely,
Donald J. Boudreaux
George Mason University

A New Deal for Globalization?

Russell Roberts

In the latest issue of Foreign Affairs (HT: Fabian Franco and Nathaniel Clarkson), Kenneth Scheve and Matthew Slaughter argue that we need a New Deal for globalization. Here is the summary of the article:

Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Here is the key empirical claim to support the proposed policy:

Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s.

I didn't see a source for this claim about different educational groups. I assume it's true. But three things trouble me about it.

The first is most people would have trouble telling you whether their real income today (or in 2005) is higher than it was in 2000. Most people have higher nominal income. They are unlikely to have a precise idea of the rate of inflation over five years. So unless they look the number up, they'd have trouble giving an accurate assessment of their economic progress over their five years. So I'm not sure that the income numbers of the last five years are creating a political backlash against immigration.

Second, I think most people would have an opinion about how OTHERS have done over that five year period. I think most people think other people are falling behind even if the person answering the question is doing fine. They are pessimistic about others because that is what they hear over and over again—that most people are doing badly. They hear it from the press. They hear it from many politicians.

Third, and this is the most important point, money income is deceptive in a world of expanding fringe benefits.

If your money income, corrected for inflation, stays constant, but your health care benefits rise to cover the rising cost of health insurance, in recent years, you are better off. Why? The increase in your health care benefits just cancels out the increase in health care costs, but those costs are included in the deflator used for money income. So in fact, you have more purchasing power--your real income has increased. I didn't say that so well. Here's a better way to see it, from analysis by Gary Burtless:

I'm not sure you can read the figure but here's the gist of it. Between 2000 and 2005, compensation for the average worker rose $3000. But money income was only 29% of the increase. The bulk of the increase was in non-monetary compensation—increases in health insurance, pension contributions and taxes for social security.

Instead of finding ways to save globalization with redistribution, maybe we should try educating people about how labor markets work and the importance of fringe benefits.

Of course, these numbers from Burtless are average numbers. It's still possible that a lot of people didn't see their standard of living improve between 2000 and 2005. But it's also clear that just looking at money income is only part of the picture.

Mayor Mike's Most Recent Folly

Don Boudreaux

Here's a letter that I sent today to the New York Post:

Dear Editor:

With the creativity of a drunk sailor, Mayor Bloomberg proposes that poor people be paid to care for themselves - given cash rewards to do things such as stay in school, go to the dentist, and hold steady jobs ("... And Paying the Poor," June 20).

Your criticisms of his plan are on target.

I ask the Mayor if in running his private business he would seriously consider hiring anyone so unmindful of his or her future that that person would go through the motions of self-responsibility only if bribed to do so?  Surely the answer is no.

Paying someone to playact at self-responsibility no more creates a self-responsible person than paying someone to playact as a lawyer creates a skilled attorney.

Sincerely,
Donald J. Boudreaux

The web and political philosophy

Russell Roberts

The latest EconTalk podcast is with David Weinberger talking about the ideas in his book, Everything is Miscellaneous.

I found the book very interesting. He explores the implications of some of the latest web developments such as tagging, social sites, and wikipedia for how we consume and think about information. I found his discussion of tagging particularly interesting. By tagging stuff (pictures, websites, blogs) with keywords, we organize stuff in a totally different way than if we simply bookmarked stuff and put it in folders.

One question I asked him about was the implication of the evolution of the web for one's political philosophy. Weinberger was Howard Dean's internet advisor. So I thought he might be uncomfortable being involved with a more top-down set of policy positions. He didn't really bite. But on his blog, he talks about how a hyper-linked world is a post-modern world, which is more conducive to left-leaning policies. Seems to me the essence of the web is a decentralized world, a world whether information and power and ideas and solutions don't have to be top-down but are more likely to be bottom-up. It would seem to me that if you're a fan of tagging and social web sites and wikipedia, it's hard to embrace centralized solutions to social problems. But maybe not.

Check out the podcast. He has a lot of insights into the web and information and how we look at the world.