Cafe Hayek

Little Puffs of Smoke

My computer is hospitalized now, being cured of a serious virus. I hope to have it back soon – along with, I’m sure, a justified admonition by George Mason University’s computer-support staff that I should more diligently scan for viruses.

Isn’t the number of computer viruses astonishingly large? In its own macabre way, it impresses me. Lots of people sit around and think these things up and then launch them.

One reason so very many mischievous people use computer viruses as their means of expressing their urge to interfere annoyingly in the lives of others is that computer viruses are anonymous. Probably because of the way that natural selection engineered us, most of us find it to be much easier to irritate and harm faceless, abstract people than to do the same to people whom we must look in the eye, knowing that they know that we are responsible for their misfortune.

Thinking about computer viruses reminded me of two gentlemen I knew years ago. Both fought for the U.S. in World War II., and each is among the most gentle and civilized men I’ve ever known. The one difference between Bill and Joe (the names are fictional) is that Bill was always rushing off to attend this or that reunion of his WWII bomber crew; he loved reliving his wartime exploits. Joe almost never mentioned his experience in the war.

Ten years ago I wrote this column about these two friends. The core of my column is in this paragraph:

I once asked Bill why he attended so many reunions with his former crew members and why he never tired of recollecting his war years. And why does Joe say absolutely nothing about his time in the army? Bill’s response is revealing. “Joe fought in combat, face to face with the enemy. He saw lots of blood and guts and death and suffering. But for me, the war was great. Nothing bad happened to me. My buddies and I flew lots of missions over Japan and nearby islands. All I ever saw were little puffs of smoke on the ground where our bombs hit.

Sitting in your home or office and launching computer viruses is much like being a bomber flying high above your victims. You know they exist, but you never see them. To you, the virus-master, these victims are abstractions. It’s easy to inflict harm on abstractions – not only materially easy (they’re not going to punch you in the nose), but also psychologically easy (because you don’t have to face the eyes, the words, and the body-language of your victims, you avoid suffering the potent immediate feedback of expressed human displeasure at your misbehavior). In short, you don’t really care what faceless, nameless, abstracted strangers think of you. They don’t even know you.

Except for the prankishness, politicians and government bureaucrats are much like computer-virus-masters – or bomber crews: most of the effects of their policies, good or bad, are experienced by faceless, nameless, abstracted strangers. It’s much easier to harm such strangers. I suspect, for example, that President Bush knows that he harmed lots of people with his steel tariffs and with his continuation of grotesquely large farm subsidies. But he doesn’t see these victims face to face; they're abstractions – little puffs of smoke.

Prices: The Great Equalizer

Last night I was a guest on Jay Diamond’s radio talk show on WRKO in Boston. The issue was price gouging.

Mr. Diamond supports regulations that prevent so-called “price gouging.” The hypothetical possibility he raised again and again was a shortage of food following a natural disaster, with the unregulated high prices making it impossible for a poor family to feed its starving children, while a rich drug dealer gets all the food he wants.

My response to this hypothetical was only mediocre. I pointed out that the relevant question is “as compared to what?” While I’m confident that this response is a sound start, I didn’t carry my point to as compelling a conclusion as I would have liked.

Here’s what I would like to have said, had I the eloquence and the time; my concluding line would have been “market prices are the great equalizer.”

I would have reached this conclusion by pointing out that any alternative to freely adjusting prices involves some non-price method of rationing. Any practical, realistic method apart from rationing by price hikes will involve arbitrariness at least as great (I think greater) than whatever arbitrariness there is in income distribution.

One alternative method of rationing is queuing. But surely first-come, first-served is quite arbitrary. Perhaps the father with starving children will get to the front of the line, but who’s to say that the drug dealer won’t beat him to the front of the queue? Indeed, the father with starving children likely has lots of important tasks to carry out at home in the immediate aftermath of a natural disaster. These tasks might well keep him at home too long to get a favorable spot in the queue, or, if he does get a favorable spot, he’ll waste lots of time queuing rather than being at home with his family during an especially dire time of need.

An even more likely alternative to rationing by price is rationing by personal connections – family ties or political ties. The poor family with starving children is unlikely to have as many personal and political connections as are wealthier people in town. The outcome of rationing by connections will almost certainly be biased in favor of wealthier, more-prominent citizens.

One great advantage of rationing by market prices is that they reduce to a minimum the role of arbitrariness. Price are, in other words, a great equalizer. Anyone who is willing to pay the market price for a good or service is just as likely to get that good or service as is the seller’s mother, neighbor, or bowling buddy.

Oh Dear! Foreigners Continue to Invest Here!

Here’s a letter that I wrote today to the New York Times in response to another reader’s letter on the so-called “twin deficits.”

Perhaps our posterity will look back upon the current fears over the trade deficit with the same puzzlement that we today look back upon past fears of miscegenation, rock ‘n’ roll, and microwave ovens.
.......

28 August 2004

Editor, The New York Times
229 West 43rd St.
New York, NY 10036-3959

Dear Editor:

Reader Robert Lauer calls the U.S. budget deficit and trade deficit “twin 500-pound gorillas” (Letters, August 28th). He’s right to worry about the budget deficit, which reflects the administration’s and Congress’s recklessness. But the trade deficit is no cause for concern. It reflects foreigners’ preference to invest in American assets rather than to cash out all of their dollar holdings immediately for goods and services. This fact means not only that more investment than otherwise takes place in the U.S., but also that more foreigners have real reasons to wish the American economy well.

Your newspaper would help to end this needless fretting by referring not to the "trade deficit" but to the "capital-account surplus." The two are the same thing, except that the former sounds oh so very ominous.

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, VA 22030

Mel Brooks was right

When I was a kid,one of my favorite routines was Mel Brooks as the 2000 year-old man interviewed by Carl Reiner. At one point, Reiner asks Brooks his candidate for the greatest invention of all time. Brooks, without hesitation answers:

Saran Wrap! You can make a big saran wrap, a small saran wrap, you can see right through it!

Saran Wrap??!! What about fire, Reiner asks.

That was good, Brooks answers pensively.

Though it came out more like, "dat vas gud" using the Jewish accent he used for the character and Reiner's question may have been about the wheel. And there's more to the saran wrap riff—it goes on for a while, there's something about a peach. I haven't heard the routine in decades so I'm working from very old memories.

Having moved into a new house earlier this week, I'm coming around to the Brooksian viewpoint. (Though go here for my nomination for the greatest product of the 20th century.) You'd think moving was basically an unimprovable exercise—a bunch of really strong people put your stuff on a truck and then take it off. But there has been innovation in moving and Saran Wrap is a key part of it.

They Saran Wrap all the dressers. OK, it's more like a shrink wrap but it's the same stuff. You don't have to unpack the dresser before they load it onto the truck. They just wrap up the dressers in plastic wrap that holds the drawers closed and protected for the move. What a pleasure. We have a big bookcase with doors. They took the doors off, wrapped each one in quilts then shrinkwrapped them to hold the quilts in place and give the doors some more protection. Then they strapped them standing up to the wall of the truck. Beautiful.

Another innovation is one of technique not technology. These guys could carry three boxes of books at a time, maybe 150 lbs. How did they do it without hurting themselves? They carried them behind their back. They bent down facing away from the boxes and picked them up with their arms behind their back, supporting the bottom box with their fingers and letting most of the weight of the top two boxes fall on their backs. Do not try this at home. But it sure looked easy. It wasn't, but if they had carried them in the traditional way, in front, they'd have broken down or the moving company would have had to have sent much larger people to get the job done.

Down with Blackboard Literalism!

In a letter in last Friday’s New York Times I argued that price increases following natural disasters, such as Hurricane Charley, accurately reflect the suddenly lower supplies of, and the suddenly higher demand for, things such as gasoline, generators, and tree-trimming services.

A retired economics professor writes in today’s New York Times a response to my letter, asserting that I mistake monopoly pricing for free-market pricing. I do no such thing. I believe, however, that I know what this gentleman has in mind – it’s the common error of taking the blackboard model of “perfect competition” too literally.

It’s true that those suppliers who, in Charley’s immediate wake, had undamaged supplies on hand for sale also had fewer competitors in their neighborhoods. Not only did the demand for their products increase, also the elasticity of demand for their products fell. For a blackboard-model literalist, this latter effect – the decline in the elasticity of demand that a seller confronts – gives that seller greater monopoly power. And the blackboard-literalist goes on to proclaim that such pricing isn’t the product of a free market.

Blackboard literalism is bad news. The fact is that with suddenly higher demand and suddenly lower supplies, the market value of available supplies rises. The higher prices charged by sellers are a simple reflection of this fact. These higher prices compel more careful resource use – economic triage, if you will. But they also attract other suppliers into this market, a market that is in especially dire need of greater supplies. Prices start to fall back as the situation returns to normal.

On this matter of defining monopoly I’m an unreconstructed Austrian (and Schumpeterian, by the way): monopoly exists only when force is used in a sustained way (usually by government) to prevent consumers from spending their money as they see fit. A significant problem with blackboard models of “competition” and “monopoly” is that, if taken too literally – as they often are – healthy market responses such as those following Hurricane Charley will be squelched by policies that are justified in the name of preventing the exercise of monopoly power.

Only Economists Bleed

Here's rock-star Alice Cooper's case for his fellow entertainers to steer clear of politics -- or, more accurately, for the rest of us to discount what Pretty and Popular People say about political issues of the day. When asked about the political activism of the likes of Bruce Springsteen and Sheryl Crow, Cooper opined:

To me, that's treason. I call it treason against rock 'n' roll because rock is the antithesis of politics. Rock should never be in bed with politics," says the 56-year-old Cooper, who begins a 15-city Canadian tour on Aug. 20 in Thunder Bay, Ont.

"When I was a kid and my parents started talking about politics, I'd run to my room and put on the Rolling Stones as loud as I could. So when I see all these rock stars up there talking politics, it makes me sick.

"If you're listening to a rock star in order to get your information on who to vote for, you're a bigger moron than they are. Why are we rock stars? Because we're morons. We sleep all day, we play music at night and very rarely do we sit around reading the Washington Journal.

I agree with Mr. Cooper. Not because I support Bush (I don't), but because I'm distressed by the all-too-frequent foolishness of the pronouncements about economics and political matters made by entertainers who venture into political commentary.

Rock on.

Promise them the Moon!

T. Coraghessan Boyle wrote one of my favorite modern short stories: “The New Moon Party.” (It’s in his 1986 collection, Greasy Lake.) This story is a marvelous burlesque of modern politics.

George Thorkelsson, governor of Iowa, is running dead last in his quest for the Democratic Party’s nomination for the Presidential election. Why does he want to be president? In his words:

I guess, even at sixty-one, I was still afflicted with those hungry pangs of ambition that every boy who can’t play center field for the Yankees will never wholly shake: I wanted to be top dog, kick off my shoes in the Oval Office, and stir up a fuss wherever I went; I wanted to climb high atop the mountain and look down on the creeping minuscule figures of queens, rock star, matinee idols, and popes. It was a cold life in a comfortless universe; I didn’t believe in God, afterlife, or leprechauns. I wanted to make my mark on history – what else is there?

Such honesty, of course, would never escape from the lips or pen of any real-world politician, but Boyle’s understanding of the typical motivation of the typical politician strikes me as right on. Notice the crushing selfishness of this motive.

Just as he’s about to toss in the towel on his quest for the ultimate political prize, candidate Thorkelsson has an inspiration on how to win the Presidency. With great fanfare and odes to the optimistic spirit of the American people, he proposes a massive project that will stir us all with its grandeur and its ability to pull everyone together in a great collective project. Another plus is the fact that it will create lots of identifiable, high-paying new jobs – and corporate profits – all funded with gobs of taxpayer money.

His project is a new moon. His new moon will be less shabby, less cheesy, than the real one. It will be made of steel girders and a stainless-steal exterior. NASA was an especially proud and enthusiastic supporter of this endeavor. (And the Russians, when their spies found out that Americans were building a new moon to orbit the earth, got into the act themselves. It was a different sort of moon race.)

The new moon’s debut, alas, brought unpleasant unintended consequences. I’ll not reveal what these are.

It’s a fun story to read.

On Foreign Intervention

I don’t write much about foreign policy. One reason is that I, as an ordinary American citizen, cannot hope to know all that high-level government officials know about the details of what’s going on abroad. For that reason (and others) I realize that I’m even more ignorant of foreign-policy matters than I am of domestic matters.

But for this very reason – because I know that I am not privy to any important military, intelligence, and foreign-policy details, and because politicians know that I and my fellow citizens are unaware of these details – I trust the government to meddle in foreign countries even less than I trust it to meddle in bread-and-butter domestic issues here at home.

If government has a core legitimate role, it is to protect peaceful citizens from physical aggression against their persons and property. Reasonable people can and do disagree over just what powers are minimally necessary for government to carry out this task.

However, nothing about this task gives government the duty or the right to intervene militarily anywhere on earth for any purposes other than those that are reasonably related to protecting its citizens from violence.

It might well be true that some foreign tyrant is slaughtering innocent foreigners. (Alas, governments are champions at massacring innocent people.) And it might well also be true that the U.S. government has the military might to intervene to stop this slaughter.

But should it intervene militarily? No; not unless there is a reasonable and demonstrable and close connection between that tyrant’s slaughtering ways and a genuine risk to Americans at home.

Ask: should Microsoft intervene to thwart a violent foreign tyrant? Microsoft’s role is making and marketing computer software. Although it possesses vast amounts of resources – probably enough to wage an effective little war abroad – warmaking is not its role. No one thinks that Microsoft is derelict in its duties if it sticks to making software and avoids expanding into the business of thwarting foreign tyrants.

Why should the U.S. government act differently? Its core responsibility is to protect Americans from violence, not to pretend to play god for the globe.

Indeed, if Microsoft or General Motors choose to set sail on military interventions abroad, at least they’d do so with their own money – not with money forcibly extracted from many millions of taxpayers who disagree strongly with the objective.

A Dark Lining Around a Silver Cloud

This morning on NPR, correspondent Susan Stamberg interviewed Susan Strasser, author of Never Done: A History of American Housework. (Originally published in 1982, this book is now back in print.)

Listening to the interview was an exercise in controlling my frustration. I gather from the discussion between Ms. Strasser and Ms. Stamberg that everyone agrees that housework before the 20th century’s gift of electrical household appliances was ceaseless drudgery borne almost exclusively by women. In addition, everyone agrees that “big, shiny appliances” (as Ms. Stamberg kept referring to them) released women from this back-breaking drudgery, as well as made households much cleaner and more sanitary. Ms. Stamberg and Ms. Strasser agreed also that no modern woman (including themselves) would want to return to the pre-appliance days of yore.

And yet these two women, searching diligently, found the dark speck in this bright, blue sky.

For example, when women had to hang their laundry to dry, they had greater chance of encountering their neighbors doing the same in their respective backyards. A good conversation resulted. Today, according to Ms. Strasser, women are more isolated – and made so by electrical appliances, kept in their basements by the convenience of an automatic clothes dryer. Also, mindless, repetitive tasks are often a blessing, according to Ms. Strasser. Having, say, to iron wrinkled clothing or darn socks “roots us” or “cements us.” (I forget her precise words; the link to this interview won’t be posted before tomorrow.)

This interview is evidence that bright people can find the downside of any piece of good fortune – but that the same bright people do not necessarily possess the wisdom to weigh the downside properly against the upside. It’s as if a very ill child was completely cured by a talented physician, and the parents of the child, admittedly grateful, focused their discussion on the fact that now their little one will grow into adulthood and have to pay bills, suffer heartbreak in love, find a job, and encounter the many trials and tribulations that every adult endures. These are downsides, to be sure, but they hardly count against the blessing of seeing your child saved from death.

There are downsides to greater convenience and greater household cleanliness. But how weighty are they?

Tabarrok, DeLong, and Contract Law

Brad DeLong overlooks the fact Alex Tabarrok, in his original post on whether or not tenants benefit from government-mandated minimum quality for rental housing, alludes to the implied warranty of habitability.

Contract law is beautiful in its subtlety. This law typically examines questions from the point of view of the “reasonable person” – that is, when a contract dispute finds its way into court, the law asks about the question before it: “what would the reasonable person have expected (or said, or done) in the circumstances at issue?” In modern America, the reasonable person reasonably expects that the rental unit has running water 24/7, that the ceiling doesn’t leak, and that other basic features of the apartment are in order.

Here’s how one lawyer, in an on-line Q&A, defines the implied warranty of habitability:

A landlord warrants to the tenant that the leased property is habitable. This is known as the implied warrant of habitability. This warranty is not against all inconveniences or discomforts. A claimed defect must be on the premises and must directly affect the tenant's ability to occupy the demised (rented) premises. Transitory failures generally do not constitute a breach of this warranty. Courts have found that the breach must be so substantial as to amount to a constructive eviction. This means that the problem must be so bad that the tenant cannot continue to occupy the space and would have to leave unless the repairs were made.

Therefore, DeLong’s argument that government-mandated minimum-quality standards are helpful in reducing bargaining and search costs is weak. No such legislation is necessary to save apartment hunters the time they might otherwise spend ensuring that each apartment they visit, in DeLong’s words, “has a working toilet, has hot water, has a working and safe electrical and heating system, and a whole set of characteristics which are roughly what we consider to be the basic necessities of modern life.” Such minimum standards, consistent with the expectations of the reasonable person, are already implied by common contract law.

One advantage, though, of relying upon contract-law’s implied warranty of habitability (rather than upon government-imposed minimum-quality regulations) is that common-law rules generally can be waived – “contracted around.” A government mandate, in contrast, typically must be obeyed even if both parties to the contract wish to avoid the mandate.

A second advantage of relying upon common contract law is that it is far less politicized than are legislatures and regulatory agencies.

Working to Prevent Wealth Creation

At the start of each semester, I receive about a dozen visits from extraordinarily polite graduate students from India. Almost all are doing graduate work in engineering at George Mason. Each one comes to me seeking on-campus employment. I must tell each one the truth that all such on-campus employment must be coordinated through GMU’s Office of Financial Aid.

What distresses me about these visits – beyond the fact that I’m never able to accept their offers of employment in my Department – is that I know that the F1 student visa that each of these students have largely prevents off-campus employment. This reason is paramount, I’m sure, among those that propel these bright, skilled, and energetic young people to go begging for employment on-campus.

This policy is both immoral and economically stupid. It treats productive people as piranhas. The alleged concern is that hordes of productive, hard-working foreign students will come to America and – gasp! – work very productively and hard and, thereby, eliminate jobs for real Americans.

First of all, this policy rests on the absurd notion that the number of jobs is fixed, or that more workers in the labor force means lower average wage rates.

Secondly, and more deeply, what sort of policy is it that intentionally prevents people from producing wealth?

I’m unfailingly amused whenever I encounter people who oppose more open immigration on the grounds that too many foreigners come to America in order to suck the tit of our welfare state. If this justification for limiting immigration were truly the reason behind restrictive immigration policies, then we would not witness the many prohibitions and restraints on work by immigrants and foreign students.

On Power

Forbes magazine just ranked the world’s 100 most powerful women.

Modern use of the term “power” to describe someone’s influence is far too loose. On one hand, power might be defined as nothing more than the ability to produce some effect. On the other hand, power might be defined as the ability to use legitimized force to bend others to your will.

Political leaders possess especially power of this last sort. Each of us, to some degree, possesses power of the first sort. (For example, I have “power” over my students, persuading them to read the assigned chapters of the textbook in return for an increased probability of earning a higher grade in my course.)

These two meanings of the word “power” ought not be confused; they differ significantly from each other.

In the Forbes ranking, I’m glad to see that the nine most powerful women all possess power that exists because of, and is exercised through, government. It is power of the second sort. But rounding out the top ten on Forbes’s list is Carley Fiorina, Chairman and Chief Executive of Hewlett-Packard.

While unquestionably influential and wealthy, Ms. Fiorina possesses no power of the sort possessed by, say, Wu Yi, China’s vice premier or Senator Hillary Clinton. In her capacity as head of Hewlett-Packard, Ms. Fiorina cannot summon the power of the state to compel others to buy her company’s products; her income does not come from taxes extracted from citizens; if she fails to ensure that Hewlett-Packard satisfies the voluntarily expressed desires of millions of customers and suppliers, she will lose her position.

Price Gouging

There's a wonderful defense of "price gouging" by Jeff Jacoby in today's Boston Globe:

Imagine a system that could instantly respond to a calamity like Hurricane Charley by mobilizing suppliers to speed urgently needed resources to the victims. Imagine that such a system could quickly attract the out-of-town manpower needed for cleanup and repairs, while seeing to it that existing supplies were neither recklessly squandered nor hoarded. Imagine that it could prompt thousands of men and women to act in the public interest, yet not force anyone to do anything against his will.

Actually, there's no need to imagine. The system already exists. Economists refer to it as the law of supply and demand. Unfortunately, too many journalists and politicians call it by a more pejorative and destructive name: "price-gouging."

It ends with an essential example of how prices allocate resources during a disaster and quotes a member of the Cafe Hayek staff:

Newsday last week quoted the owner of a tree removal company, who had driven down from Miami and was charging twice his normal rate "because I've got to deal with more aggravation."

"No one wants to come here when I can stay home and sleep in air conditioning next to my wife and kid, go to the gas station whenever I want and get gas," he said. "The ones who are willing to pay now know that they're not getting a great deal, but they're willing to pay a little bit more to get their lives together quicker."

At the same time, price increases perform what George Mason University economist Donald Boudreaux calls "economic triage," directing supplies and repairs to those whose need for them is most pressing. Someone who wants a generator so he can power his computer and TV might be willing to rent one for $250. At $400, he is more likely to decide he can live without it -- thereby making it available to the butcher desperate for electricity so he can keep thousands of dollars' worth of meat from spoiling.

When demand increases, prices go up. As prices rise, supplies do, too. And with higher supplies eventually come lower prices. It isn't "gouging," it's the way the world works -- even after hurricanes. Demonizing vendors won't speed Florida's recovery. Letting them go about their business will.

Don's piece on price gouging is here.

Higgs and De Soto

Economic historian Robert Higgs was a guest at my and Karol’s Virginia home this past week. Bob lives in Covington, Louisiana, which is on the north shore of Lake Ponchartrain, 25 miles north of my hometown of New Orleans.

Bob, Karol, and I were discussing economic development, along with Hernando de Soto’s work on the importance of formalizing property rights (especially rights in real estate). Bob observed that both Covington and New Orleans have the very same system of land titling and ownership registration. It’s a very formal system that -- in a way to elicit de Soto's admiration -- makes clear who owns which piece of property.

And yet, as Bob points out, the economic conditions in Covington differ dramatically from those of New Orleans. New Orleans suffers even more than the typical American inner city from violent crime, and New Orleans is much more economically stagnant than is the typical American inner city. Indeed, one significant reason that the north shore of Lake Ponchartrain has become such a desired location is that New Orleanians are increasingly seeking a refuge from crime -- which is to say, a refuge from distressingly insecure property rights.

My parents recently moved from New Orleans’s close-in suburbs to the north shore. I easily witness the economic dynamism that is now transforming the north shore from a sleepy, rural outpost into a vibrant, culturally interesting, and wealthy community – while New Orleans proper is stagnating.

De Soto’s point is important. But it must not be oversold; it’s no magic bullet. Perhaps formal, impartial, and explicit property registration is a necessary condition for economic growth. It is not a sufficient condition. If it were sufficient, inner-city New Orleans would be just as economically dynamic and robust as is the north shore of Lake Ponchartrain – a place just 25 miles from the French Quarter and with the very same system of formal, impartial, and explicit property registration.

Minimum Wage Data

In my last post I mentioned the proportion of the work force that earns the minimum wage or less. I just checked with the Bureau of Labor Statistics to get the latest data. In 2003, using data from the BLS's household survey, there were 138 million people working of which 73 million were paid by the hour. Of that number, 2.1 million, or 2.9% were paid the minimum wage or less. So the 2.9% number is probably an overestimate for the labor force as a whole.

Minimum Standards

Over at Marginal Revolution, my colleague Alex Tabarrok is in an internet shouting match over whether landlords should be required to provide basic amenities that would make their apartments "habitable"—hot water, air conditioning and so on. Alex argues that such requirements make the apartments more expensive and potentially give tenants attributes that they would not be willing to pay for. His critics argue that in a world of monopoly power and a world where tenants frequently have no bargaining power, then there are surely benefits from such laws that prevent tenant exploitation.

Alex makes an excellent point that even when you accept the argument that there is monopoly power, minimum standards still make tenants worse off. But I want to bring up another more basic observation. Are his critics right that the world we live in is inhospitable to renters? Does the monopoly power of landlords allow renters to be exploited?

When I give lectures outside of the university, I often ask my audience to guess the percentage of the work force that earns the minimum wage or less. The median answer, across a wide array of educated audiences (journalists, congressional staffers, law professors) is very stable. The median answer that I get in these surveys is between 20% and 25%. That's the median. So half of the audience thinks it's higher. A substantial number answer 50%. The actual number is about 3%.

I once asked a group of law students why America's standard of living is higher than Mexico's. A common answer was that we had a minimum wage, Mexico did not. I suspect Mexico has a minimum wage, but never mind. The real problem is that when 97% of the American work force earns more than the minimum wage, it's hard to make the case that regulations keep wages high. Competition keeps wages high. Your world view may be that employers always have the upper hand, that employees always bargain from weakness, but if that's true, it sure is hard to explain that 97% number. Why do those rapacious employers pay so much more than they have to? (As for the argument that it's labor unions, another common answer from the law students to explain our standard of living being higher than Mexico's, unions are about 10% of the private work force. That proportion has been falling steadily for decades as compensation has risen steadily. And see the previous post by Don on the issue of whether labor immobility allows workers to be exploited.)

Do we need to require cars to have brakes? Steering wheels? Windshields? Wheels? How about CD players? Drink holders? Automatic locks? Remote locking and unlocking? The widespread provision of these amenities comes from competition among sellers to find customers.

To return to the landlord case, the challenge of finding a nice apartment in a big city is precisely because landlords offer the amenities they do. If there were no habitability regulations that required hot water, air conditioning and whatever else, do you think landlords could get away without offering those amenities? You don't think they'd compete with each other they way employers do for employees, the way car makers do for buyers, by actually trying to give their customers what they want?

A final point. One hundred years ago apartments had no air conditioning. Only a portion had indoor plumbing or non-shared bathrooms. Few had iceboxes. None had refrigerators. I don't know if hot water was common, but you get the idea. Why did the world of renting change? I suspect a lot of people would say it's because government required landlords to be decent human beings. But the right answer is that the world of apartments changed because we as a nation got wealthier. Amenities that were once luxuries or were once unavailable are now considered necessary to make an apartment habitable. That change occurred because the poorest American can now afford what once were luxuries. A landlord today who offers a nineteenth century tenement will have no takers.

Monopsony Power in Labor Markets?

Arnold Kling, with his usual deep insightfulness, addressed Alan Krueger’s August 19th New York Times column on labor markets. In that column, Krueger mentions Alan Manning’s 2003 book Monopsony in Motion.

Here’s a description of Manning’s book that I found on Amazon.com:

What happens if an employer cuts wages by one cent? Much of labor economics is built on the assumption that all the workers will quit immediately. Here, Alan Manning mounts a systematic challenge to the standard model of perfect competition. Monopsony in Motion stands apart by analyzing labor markets from the real-world perspective that employers have significant market (or monopsony) power over their workers. Arguing that this power derives from frictions in the labor market that make it time-consuming and costly for workers to change jobs, Manning re-examines much of labor economics based on this alternative and equally plausible assumption.

I’ve not read Manning’s book, but judging from Krueger’s comment on it, this description seems to be accurate.

Put aside the straw man of “perfect” labor markets. No serious economist believes that an employer who cuts the wages he pays by one cent will lose all of his employees – immediately or otherwise.

Without doubting that genuine monopsony power is harmful, I dispute the implication that the absence of textbook perfection in labor markets is evidence of such power.

I have some evidence that workers – even (especially?) low-skilled workers – are extraordinarily mobile: the fact that the United States government posts armed guards along its border to keep Mexicans from entering the U.S. to work tells me that workers are willing and able to move great distances, both physically and culturally, to find higher wages and better working conditions.

If humble Mexicans must be threatened with guns and prison to keep them from migrating from poorer jobs in Mexico to better jobs in the U.S., it seems incredible that workers legally within the U.S. are stuck for any length of time in jobs offered by employers with monopsony power.

More on Price-Gouging

My friend Roger Meiners, Professor of Economics at UT-Arlington and Senior Associate at PERC, sent the following e-mail note to me in response to my post on price-gouging:

A good example of price gouging is the common practice of movie stars to jerk their price way up to appear in another movie based on high demand for their last movie. I have heard that some of them get $20 million for several weeks or months' work!!

Yet another example of so-called price-gouging might be the sale of a house at a real price far above what the current owner paid for the house. A home I know in northern New Jersey was purchased for about $40K in the early 1970s. Today it could probably sell for about $450K. Even adjusting for inflation, the value of this home has skyrocketed. And while some of the increased value is attributable to the current-owners' efforts - they take excellent care of the house and have modernized it -- the bulk of the increase in market value of the home is due to the higher demand to live near Manhattan. That is, the current owners were fortuante enough to purchase a home in a location that has increased significantly in value over the past three decades.

Would anyone accuse the owners of this home of price-gouging if they sold it for the highest price they can fetch for it?

Klinging to Happiness

Arnold Kling's essay on Robert Frank's "happiness" hypothesizing is well worth reading. It's here.

Not incidentally, I'm very proud that Arnold has agreed to teach ECON 100 this Fall semester at George Mason University. Our students' happiness will certainly increase! More importantly, so, too, will their knowledge and understanding.

Killing the Messenger

As surely as ferocious hurricanes raze trailer-home parks and power lines, merchants raise prices in the immediate aftermath of such destruction – and people and politicians complain. Economists then arrive with admonitions against admonitions against so-called “price-gouging.”

Like physicians, firemen, claims adjustors, and some other professionals, economists often find other people’s folly or bad luck to provide the best stage for displaying their professional talents.

I can’t resist.
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Complaining about “price-gouging” is useless (except insofar as it furthers a demagogue’s political aspirations). In the aftermath of a natural disaster, such as Hurricane Charley, the unalterable fact is that the value of existing supplies of things such as lumber, bottled water, electricity generators, and tree-trimmers is much higher because of the destruction. This fact is unfortunate, but it’s a fact that must be dealt with.

The higher prices charged by merchants are best thought of as a series of communications – clear messages to consumers that existing supplies must now be economized on more rigorously than before, and clear messages to suppliers that extra profits are available to anyone who can speed to the scene of the disaster goods and services that people desperately want.

Criticizing merchants who charge these higher prices is much like criticizing messengers who bring unwelcome news. The news ain’t the fault of the messengers. And if messengers who deliver unwelcome news are silenced – if they are prevented from delivering it, or punished for doing so – then those who should know the reality of the situation remain in the dark, unable to respond in ways that minimize long-term harm.

Here’s an op-ed I wrote on price-gouging after my home suffered minor damage from Hurricane Isabel in 2003.

Why do I watch the Olympics?

Why do I watch the Olympics? I don't watch a lot but I watch some. Why do I watch any? Here are people who have spent an enormous portion of their spare time learning to do something that has no intrinsic value except to compete against other people who have done the same thing. What kind of a dream is that, really? It's not like someone's dream to be a nurse or a teacher or a baker. Those involve serving others. The Olympics involve serving yourself.

I know, they're supposed to be representing their country but when the American men's gymnastic team wins a silver medal, how does it make me better off? OK, I was rooting for the Americans rather than the Romanians. But why? If the Romanians took the silver and China the bronze, what does it say about America? Nothing. It's not like the old days when the Soviets used professionals in hockey and basketball and stole the gold in 1972. Then winning meant something about America. Sort of, anyway. It's still not like leading the world in Nobel Prizes or charitable giving. So why should I care at all? But I do. Not as much as I did once, but I still care. Some would say it's a sign of emotional immaturity or mindless jingoism. I suspect it's something more primal that is not easily explained.

Sure there's something beautiful about being physically fit and doing something graceful. That's part of the appeal. But for better or worse, I think most of the appeal is the voyeurism of emotion and drama. If they didn't keep score, the whole thing would be a lot less interesting. Competition that is zero-sum is a lot more compelling and a lot less important than economic competition that produces net benefits. That's why the Olympics get better ratings than a news story on the evolution of the retail business over the last 50 years.

Here are Kerri Strug's second thoughts.

Here's an essay I wrote trying to understand why we care so much about sports.

The Causes of Poverty?

1776 saw the publication of Adam Smith’s great book An Inquiry Into the Nature and Causes of the Wealth of Nations.

Note carefully the full title (as opposed to the more frequently used abbreviation The Wealth of Nations). Written just as the booster rockets for humanity’s great wealth explosion were being ignited, Smith inquired into the nature and the causes of wealth. Smith understood that the phenomenon to be explained is wealth. Wealth doesn't just happen; it is not humanity’s default mode. Wealth must be created; therefore, wealth has causes.

Writing a mere 114 years later, another illustrious economist, Alfred Marshall, wrote on page two of his justly celebrated Principles of Economics of “the causes of poverty.” Marshall wrote these words as part of his explanation of why the study of economics is useful. But writing after the fruits of the wealth explosion began raining down widely, even as astute a mind as Marshall missed the fact that poverty has no causes. Poverty is humankind’s default mode. It’s what exists if we do nothing. “Creating” poverty -- causing poverty -- is no challenge whatsoever.

Escaping poverty has causes – that is, wealth has causes.

This point bears repeating. Poverty has no causes. Wealth has causes.

But capitalism has been so enormously successful at producing widespread material abundance that we today -- like Alfred Marshall in 1890 -- regard wealth as innate to our existence, as our default mode. It is not. The set of institutions that will promote the creation of widespread prosperity is minuscule in number compared to those that prevent people from creating material prosperity.

More of Myself on Selflessness

Recently, I wrote that the world would not necessarily be a better place if people became less narrowly, materially self-interested.

Professor Eric Crampton reminds me that a related point is made in an interesting paper by my colleague Tyler Cowen and his co-author Dan Sutter: “The Costs of Cooperation,” Review of Austrian Economics, November 1999.
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I have a further thought on the potential dangers of selflessness – namely, standing alone, selflessness is directionless and inadequately constrained. A person acting selflessly can do genuine good for another, but he must somehow know the other person’s wants, as well as know how his selfless intentions are best employed to satisfy these wants.

But how is the selfless person to know such things? In some cases, the object of selfless action – call him or her the "alms-taker” – might tell the selfless actor what he or she (the alms-taker) wants. In many cases this method works to convey accurate information. But if the alms-taker feels himself to have rather free access to others’ selflessness, the alms-taker too likely becomes irresponsible in estimating and ranking his own wants, thus causing the selfless actions to be wasted on the satisfaction of expressed wants that really are best left unsatisfied in favor of other wants (even when evaluated exclusively from the long-run perspective of the alms-taker).

In other cases, though, the object of someone’s selfless actions might not want the munificence, or might fail to reveal his or her wants clearly enough for the selfless actor to know how to behave. I quote again from George Eliot’s Middlemarch:

But how little we know what would make paradise for our neighbors! We judge from our own desires, and our neighbors themselves are not always open enough to throw out hints of theirs.

One of the great beauties of the private-property market is that it is much better than philanthropy at obliging those of us who would receive some benefit from another person to reveal to that other person just what our preferences are.

The Irrelevance of Investor Nationality

From the same August 14th Washington Post report that wallowed in gross confusion over the trade deficit:

At some point, economists think, foreigners will not want to continue investing ever-greater amounts of money in U.S. stocks, bonds and other assets.

This concern is peculiar. To see why, suppose that Americans start investing a greater portion of their dollar earnings into dollar-denominated stocks, bonds, and other assets – building more factories, planting more vineyards, training more workers, funding more R&D, and on and on and on. The long-term results of this greater investment are good, for these investments raise worker productivity and increase both the variety and output of goods and services. Our standard of living will increase.

But there’s a downside! Americans might not want (as the Washington Post reporter would say) "to continue investing ever-greater amounts of money in U.S. stocks, bonds and other assets."

It’s true. Investors whose passports are issued by the government of the United States can – for a wide-variety of reasons ranging from animal spirits to perceived changes in government policies – suddenly reduce the amount of dollars they invest in American assets. Such a reduction in investment would indeed bring down the future productivity of the economy, leading to a lower-than-otherwise material standard of living (assuming that non-Americans don’t take up the investment slack).

The point is this: if market-driven investment is a good thing (as it surely is), then, yes, it’s a trivial fact that a reduction in the amount of this good thing is undesirable.

But it makes no difference who is doing the investing; hence, it makes no difference who stops doing the investing.

If a new factory is built in my town that pays attractive wages, what difference does it – should it – make to me if the dollars used to build that factory are supplied by Americans or by non-Americans? Answer: none.

Investment is investment. Its worthiness has nothing to do with the nationality, language, religious beliefs, sex, sexual inclinations, age, hair color, or shoe size of those doing the investing. What matters is the extent to which investments are driven by market forces – by interest rates and prices that best ensure that the investments actually end up satisfying the maximum possible number of genuine human wants. The nationality of investors is irrelevant.

Deficient Reporting

Why is the trade deficit so deeply, so profoundly, so consistently misunderstood?

Read this report in today’s Washington Post. Pay special attention to the following remark:

some economists said the bigger worry is the long-term risk to the economy posed by ever-growing trade and budget deficits. The deficits reflect that Americans consume more than they produce and borrow the difference from abroad.

Ignore the fact that, contrary to the reporter’s implication, the deficit in Uncle Sam’s budget is not exclusively funded by foreigners. The more-significant error is the common one of supposing that the trade deficit (the current-account deficit, to be precise) is necessarily debt. It is not.

A foreigner who sells things to Americans can, like any American who has dollars, choose to use his dollar earnings in any number of different ways, only some of which create debt. For example, if a foreigner buys bonds issued by General Electric, he lends his dollars to an American company; debt is created.

But to the extent that foreigners who hold dollars actually hold dollars – or invest in U.S. real estate – or purchase equity shares in U.S. corporations – no debt is created. None. Nada. Nil. Zero. Zippo. Zilch.

Why do so many people so thoroughly and invariably miss this obvious fact?

Taxes and the Media

Reporters constantly confuse tax rates and tax revenue. Today we have reached a new low. The CBO has released a study that looks at the impact of recent changes in the tax law. Go to Google news and search on "CBO tax study" and you will find headlines like these:

Tax burden growing heavier for middle class (USA Today)

Tax burden shifts to the middle (MSNBC)

and dozens saying how the rich and the wealthy got the bulk of the cuts.

On one TV report a friend heard the announcer telling the viewers: Your taxes have gone up.

All of these purport to explain how the Bush tax cuts affected people in different income quintiles, the putative focus of the study.

The New York Times story did say that in fact, the study showed that everyone's taxes had gone down. But the income effects differed radically by quintile according to the Times:

People in the very top income categories fared better by almost any measure, according to the report. The average after-tax income for people in the top 1 percent of income earners climbed 10.1 percent, while that of those in the middle 20 percent climbed 2.3 percent, and that of those in the bottom fifth only 1.6 percent.

Here is the summary from the MSNBC story:

The CBO study, due to be released today, found that the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop from 64.4 percent of total tax payments in 2001 to 63.5 percent this year.

Unfortunately, neither of those assessments are true.

These stories act as if the CBO had studied how people today have seen their tax burden change. But that is not what the CBO study did.

The CBO study is a simulation based on 2001 incomes.

It tells us nothing about what has actually happened to individuals at various income levels, nothing even about people in different quintiles. What the CBO did is take incomes in 2001, assume they grew at a constant rate and then estimated what would happen under the tax legislation that has occurred since then. The CBO did not take account of any changes in behavior. They did not take account of the recession or any actual reality that has occurred since 2001.

To say it another way, the CBO study could have been written in 2001 if we had known then which changes in the tax code would be enacted. It is a forecast. It may capture what has actually happened since 2001 or it may not.

So statements such as "the very top income categories fared better" or "the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop" are fantasies unsupported by the study.

Of course the rich did get the bulk of the Bush tax cuts, if you define "bulk" as "saw the largest reduction in what their taxes would otherwise be." The rich pay the bulk of the income taxes (a fact noted in the New York Times study but often ignored in other accounts.) But the implications for tax burdens by class or after-tax incomes cannot and will not be known for another few years.

As I argued earlier, the fiction that payroll taxes fund social secutiy hampers our ability to truly cut taxes across the board.

A Good Word for Narrow, Material Selfishness

A frequently overlooked benefit of material self-interest is that it helps us to keep our noses out of other people’s business.

I overheard a cafeteria discussion recently in which a woman expressed heated hatred of homosexuality. “It’s just wrong!” “It’s disgusting!” “I don’t know why we tolerate it!”

Her lunch partner was silent; I don’t know if he agreed or disagreed with her.

But hearing this woman got me thinking: Why does she care? No one forces her to engage in homosexual acts, or to watch such acts performed. She can ignore them and lead her life as if they never occur.

If this woman were more narrowly self-interested, in a material dimension, she would spend more time thinking about how to improve the furnishings in her home, what school is best for her children, where to vacation next summer, how to raise her income – all sorts of matters that would divert her attention from worrying about affairs that are none of her business.

In fact, though, because this woman does care – and, believe me, her tone of voice suggests that she truly and deeply cares that some people engage in homosexual activity – we can say about her that she is not completely, narrowly, materially self-interested. Part of her is altruistic, other-regarding, not-selfish. She would not materially gain if homosexuality diminished or even stopped.

However, her altruistic, other-regarding, un-selfish wish that homosexuality be eliminated is horrid. It’s an instance of an other-regarding motive that is destructive.

It’s true that the world might be an even better place if each of us were a little less materially selfish and, in consequence, a little more giving to others of things that others genuinely desire and that yield long-term benefits. But it is a teeth-gnashing error to assume that reducing self-interestedness will necessarily make the world a better place. If people's other-regarding inclinations cause them to intrude into areas that are best left to others, greater altruism will be harmful.

Work at a Better Explanation

Historian Niall Ferguson has an interesting op-ed in today’s Los Angeles Times. In it, we learn just how much less time Europeans spend working compared to Americans. Along the way as he relates these data, Ferguson offers some reasons to explain the fact – a fact that has become much more pronounced over the past 25 years. Differences in marginal tax rates is one that Ferguson mentions, along with government-enforced restrictions on the maximum number of hours anyone can work per week. Also mentioned is the fact that American employers can – compared to their European counterparts – much more easily fire lazy employees.

These reasons strike me as pretty sound explanations for why the average German worker works 22% fewer hours per year than does the average American worker, and the average French worker toils 32% fewer hours.

But Ferguson ends his op-ed curiously: despite these strong explanations mentioned earlier in his op-ed, he concludes that the likely explanation for this difference in work patterns is the fact that more Americans than Europeans attend church. Apart from an allusion to Max Weber’s protestant-ethic thesis, Ferguson offers no further justification for identifying Americans’ greater church attendance as a reason why Americans work more than Europeans.

Curious.

Spontaneous Property Rights

A major confusion that befuddles the modern mind is the distinction between law and legislation. Too many moderns believe that law is exclusively legislation.

The definitive work on this important distinction is Hayek’s Law, Legislation, and Liberty, Vol. 1 (“Rules and Order”).

Law is so much more vast than legislation, and so much richer. Much of it – perhaps even most of it – isn’t written down anywhere. It’s embodied in people’s expectations about how others will act and about how others expect each of us to act under various circumstances.

I reflected on this fact yesterday in the George Mason University parking lot. It was mid-day, so parking-spaces were scarce. As I walked from my building to my parked car, keys in hand, a woman driving a car noticed me. She asked me if I was leaving. I immediately knew why she asked.

“Yep,” I replied. “But I’m parked down at the far end of the lot.”

She followed me slowly. As I neared my parked car, another car approached from the other direction; its driver, too, was clearly looking for a parking space. This second car paused momentarily when its driver saw me. But – and here’s the interesting fact – as soon as that second driver noticed the car following slowly behind me, this second car sped up and drove by, realizing that another driver had established a prior claim on the parking space that I was about to abandon.

That is, merely by being the first car to follow a pedestrian walking to his or her car in a crowded parking lot establishes a property right for the “following” car in the parking space about to be abandoned.

This rule isn’t written anywhere. No one designed it or planned it. It evolved spontaneously. And it works remarkably well. I regard this rule as a law.

Fact Checking

Just found out about factcheck.org, a non-partisan group that monitors the claims of politicians and political activists. They actually appear to really be non-partisan as opposed to simply claiming the mantle. They have a very nice and very clear analysis of the Kerry claim I mentioned in an earlier post about new jobs paying $9,000 less than old ones.

A kind of correction at the Times

The New York Times has corrected the article I blogged about recently. I had contacted the ombudsman who routed my concern to the reporter.

Corrections are interesting in the internet age. A dead tree correction sits by itself a day or a week after the original article. The original mistaken article survives on microfilm misleading the unaware reader. And of course the consciousness of the reader who does not see the correction survives blissfully unaware as well.

On the web, corrections at the Times at least, are noted on the original article. Under the headline, the phrase "Correction Appended" appears and at the bottom of the article is the correction for the ambitious reader:

Correction: Aug. 11, 2004, Wednesday

An article in Business Day on Monday about the number of new low-income jobs compared with high-income jobs misstated figures from an analysis of Labor Department payroll data conducted by Economy.com, an economic research firm. Since January, industries ranked in the bottom fifth in terms of median wages have generated 177,000 jobs, not 477,000. Industries in the top fifth generated 135,000 jobs, not zero.

Unfortunately, the correction does not discuss the damage this change does to the central claim of the article. The article claimed that the economic recovery was producing too few jobs that paid too little. In support of the last point, the single fact mentioned in the correction was the only evidence. Here is that fact, correctly stated: Since January, the U.S. economy has created 1.1 million jobs as measured by the payroll survey of the Bureau of Labor Statistics. Of these new jobs, 17% are from the industries whose average wages are in the bottom quintile of all industries, while 13% of the new jobs are from industries in the top quintile.

Cause for concern? Hard to say without more information on the details, whether the quintiles are stable, whether the actual jobs, rather than the industries, pay less, whether the same pattern emerges when benefits are included and whether this is standard during a recovery.

I have the comparable data for the recovery after the 1991 recession. I went four months out from the trough of the employment numbers to make it comparable to January 2004. Then I went out for the next seven months. During that seven month period after the 1991 recession, payrolls grew by 924,000. Of that increase, 18% of the jobs were in the lowest quintile and only 10% in the top quintile, yet somehow, the recovery and the near-decade of expansion survived. (These calculations are based on the data provided to me by economy.com that were used to draw conclusions from the current recession. I wouldn't quote them without verifying their accuracy. They are supposed to correspond to private non-farm payroll employment).

To really nail this down, I could do another calculation for a comparable period relative to the end of the recession rather than the trough in employment. But you get the idea: there's no there, there. No cause for concern in the recent data and no cause for a front page Business Day article either.

Post-script: Ironically (embarrassingly?), this post has been amended after I discovered a numerical error in the earlier version of the post. The correction does not change the conclusion. Phew!

Not So Innocent

Suppose the country’s government were run by children between the ages of four and eight. Further suppose that this situation is unalterable; protesting against it – advocating that adults be put in charge – is futile.

In this world, all political discussions would be directed at, and by, young kids. All elections would be for the purpose of choosing which particular children will exercise government power for the next few years.
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This little thought experiment conveys my sense of politics. I don’t insist that my sense is correct, but it is truly my sense.

Because this is my sense, I don’t vote. Choosing which children will wield political power strikes me as both pointless and comical. True, some children are better than others, but most are brats if they’re insufficiently constrained by adult discipline.

Why is this my sense? Simple: a child is someone who is insufficiently mature to understand and deal with the fact that our world is inevitably one of scarcity and tradeoffs. Children revolt against constraints (while good parenting involves teaching children that constraints are unavoidable).

Imagine a set of parents who tell their child “Junior, no matter what you do, we’ll do all that we can to relieve you of the unpleasant consequences. Also, whatever you want, don’t worry, we’ll buy it for you.” Spending other people’s money willy-nilly, and being able to shift blame for your actions onto others encourages childish behavior.

Politicians spend other people’s money. And because the consequences of whatever political choices he or she makes are typically spread out in complex fashion among thousands or millions of people – and because the world is a far more knotty place than many people seem to realize – politicians can easily take credit for whatever pleasant events unfold and point accusing fingers at others for whatever unpleasant events come to pass.

This essay of mine expands this idea.

Krugman on Cheap Labor

This March 1997 Paul Krugman essay on low-wage foreign workers, published in Slate, is excellent. It's worth a read; actually, it's worth two reads.

(Reading this essay supplies a good reason for hoping that John Kerry wins the November election: With a Democrat in the White House, Paul Krugman might rediscover legitimate economics.)

Churchills everywhere

I'm currently reading two books, Quicksilver by Neal Stephenson and The Last Lion by William Manchester. Quicksilver is a great disappointment, I am sorry to report. It is the first volume of a three volume prequel to the extraordinary Cryptonomicon, one of the most entertaining books I've read in the last ten years. The Last Lion is the riveting first volume of Manchester's unfinished three volume bio of Winston Churchill.

John Churchill, the first Duke of Marlboro, is a character in Quicksilver, as is Winston Churchill the first, John's father. John won the Battle of Blenheim in 1704 and the Queen honored his victory by building him a palace that he named for his conquest. Manchester gives us some facts about Blenheim Palace where Winston the later was born in 1874.

It has 320 rooms. The house's footprint is seven acres. (I love a house where you don't bother with square feet and just do the acres.) Nice yard, too—2700 acres of parkland though modern accounts give it as a mere 2100. Either Manchester erred or they sold some off. Or I misheard the number listening on my iPod. Either way, plenty of room for picnics, cricket, golf or anything other than a major military engagement.

The Great Hall's ceiling is 67 feet high. The Palace's library is the longest room in any private home in England, 183 feet. That's 60 yards, folks. It was originally built as a portrait gallery. Today it holds 10,000 books. There's still a little room left over for a few pictures.

But my favorite fact about the Palace is the key to the lock that opened the door to the Great Hall. It was brass and weighed three pounds. Three pounds! Where do you put it? How big is the key ring for that key? How big is the doormat you slide it under?

Of course, the really rich rarely carry keys. They have doormen and drivers. Manchester points out that Winston never drew his own bath, never rode a bus and took the tube only once and had to be rescued because he was lost. But the best story Manchester tells of the rarefied life of the British aristocracy is about a cousin of Winston's. He was traveling without his valet and complained to friends on the trip that his tootbrush was not "frothing properly." The friends explained that a toothbrush needed paste to froth. The cousin was unaware of that crucial step—his valet always took care of it. This makes Bush 41 look like the salt of the earth.

"Fewer Jobs! More Crime!"

I remember a political ad that ran in 1982 on local Alabama television station. It was paid for by a candidate for a seat on the council in Lee County, Alabama. This man’s courageous motto was “More Jobs. Less Crime.”
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Here’s a fun exercise during this political season as you listen to news broadcasts and read newspapers and websites: each time you hear or read a statement by a candidate, ask yourself if you can seriously imagine that candidate’s opponent publicly expressing the opposite opinion. If you answer “no,” then that candidate has pronounced a mere platitude, a banality, and said nothing worthy of attention.

For example, I cannot imagine that the opponent of the above-mentioned candidate for a seat on the county council would have said “My esteemed opponent, Mr. _____ favors more jobs and less crime. I dissent! If elected, I will work for fewer jobs and more crime!”

Likewise for the many candidates who will no doubt audaciously proclaim their opposition to wasteful government spending and unfair tax breaks, or their support for a strong America and for better education for our children.

My guess is that well over half of what any candidate for political office says publicly is mere platitudes (as compared to substantive statements).

Of course, candidates sometimes do make substantive statements – for example, John Kerry’s insistence that, as President, he will work for drug-reimportation from Canada. Likewise for George Bush’s pledge that he will not reduce Social Security benefits for retirees and for those near retirement. You might agree or disagree with these positions, but such statements are substantive and not platitudinous.

But so, so much of candidates’ bombast and swagger are mere platitudes. One mark of successful candidates is their ability to pronounce platitudes in a tone of voice and with majestic body language that convey the impression that their platitudes are substantive, bold, and creative proclamations. It’s theater.

Classy vs. Brassy

Isn't it time for a debate between Laura Bush and Teresa Heinz Kerry? The Washington Post reports that poor Laura is being harried with unending questions about her more colorful challenger.

Laura Bush has heard enough Teresa questions.

"Every interview," the first lady says, shaking her head when asked how often she's being queried on her outspoken counterpart, Teresa Heinz Kerry.

Teresa, Teresa, Teresa.

"It was the last question I got from the St. Paul reporter at the last event," Mrs. Bush says. She got Teresa questions from reporters in Pennsylvania, Ohio and Michigan on Monday, and in Wisconsin and Minnesota Tuesday. And there's still Iowa left to go before Mrs. Bush wraps up her two-day tour of scripted sweetness and devotion to George W. Bush -- in other words, her "I'm Not Teresa Tour."

A Laura—Teresa slugfest would make the impending Cheney—Edwards snoozefest look like a late night infomercial for the vegematic. It would probably outdraw Bush—Kerry.

Teresa definitely wins the beer battle. But it may not apply to first ladies. Tea may be more what the American people are looking for.

Why limit the competition to a debate? How about a heptathlon? The faceoff is held in a studio created to look like the White House. Each contestant would have to host a brunch for the DAR, meet with school children visiting from Ohio, lead a task force on education policy, film a public service announcement about some social problem, defend her husband at an impromptu press conference, sit next to a drunken Prime Minister of a foreign nation at a three hour state dinner and finally, waltz with her husband wearing a dress designed in the nineteenth century. The hard part is waltzing while you're holding the javelin. (A hat-tip to Don Cox for inspiration.)

Boudreaux on Bordeaux

A report in today’s New York Times describes the difficulties now suffered by many of the non-elite vineyards in Bordeaux. One vintner says that recently he had about five million bottles that weren’t moving: “Only by reducing prices 30 to 40 percent were we able to sell any of it.” (Being absolutely mad about wine, I welcome this news. Being absolutely mad about economics, I'm delighted to encounter evidence that the law of demand works even in France.)

The tale is typical: When wine prices spiked in the late 1990s and into 2000, several Bordeaux vintners expanded the acreage under cultivation, many with borrowed funds. Prices of all but the elite wines, such as Petrus and Chateau Lafite-Rothschild, have fallen significantly – evidence that too many resources are now used to produce wine. Many of these resources, including labor, are likely better used to produce things other than wine. (Being absolutely mad about wine, it pains me to write such a thing.)

The typicalness of the tale continues: many of these smaller vintners are demanding that the French government guarantee that they receive a minimum price for their wine. Such a guarantee, of course, would keep too many resources in the business of producing wine that is less valuable than other things that can be produced with the resources that should be released from wine production. (Being absolutely mad about wine – and about economic sanity – I strongly oppose government guarantees of minimum prices.)

But not all demands by the smaller Bordeaux vintners are unreasonable. One meritorious demand is that the government bureau that oversees (in great detail) the production and labeling of wines loosen its grip. For example, wines from Bordeaux cannot be sold with labels that prominently announce the variety of grape from which the wine is made. That is, the label can’t have pasted on it, say, “Merlot” – even if the wine is made 100% from merlot grapes. Instead, each label features the name of the chateau and some other esoteric information that isn’t easily understood by non-wine-snobs.

Prohibiting the useful display of the grape variety on the label makes marketing more difficult – hence reducing sales. If consumers respond positively to labels with grape varieties prominently displayed – and we seem to do so – where’s the harm in eliminating this prohibition? (Being absolutely mad about wine, I encourage any and all moves that will strengthen a free market in the precious nectar.)

The Terrorist Talent Pool

The New York Times reports that new terrorists are rising up to replace those who have been killed or arrested:

Using computer records, e-mail addresses and documents seized after the arrest of Mohammed Naeem Noor Khan last month in Pakistan, intelligence analysts say they are finding that Al Qaeda's upper ranks are being filled by lower-ranking members and more recent recruits.

"They're a little bit of both,'' one official said, describing Al Qaeda's new midlevel structure. "Some who have been around and some who have stepped up. They're reaching for their bench.''

While the findings may result in a significant intelligence coup for the Bush administration and its allies in Britain, they also create a far more complex picture of Al Qaeda's status than Mr. Bush presents on the campaign trail. For the past several months, the president has claimed that much of Al Qaeda's leadership has been killed or captured; the new evidence suggests that the organization is regenerating and bringing in new blood.

The implicit criticism is one you hear often about the war on terror: we should just give up, because by fighting terror, we enrage people and enlarge the pool of new recruits to the anti-American cause.

It's an interesting practical concern. Surely if the Hydra grows a new head every time one is removed, then you're simply wasting resources swinging your sword. Better to try some other technique.

But the criticism misses an important point about the distribution of terrorist talent. The criticism assumes that the guy on the bench is just as good as the first stringer. But I assume terrorism is like anything else—some are better at it than others. Getting rid of the best means that the ones who replace the best are not as good. It's like saying that if the top 50 pitchers in baseball decided to become basketball players, new pitchers would come along to replace them and there would still be major league pitchers. Yes, there would still be major league pitchers. But they wouldn't be as good.

The same argument is often applied to the potential capture of Osama Bin Laden. He's just a figurehead. He has many lieutenants. You also hear that if we kill him, then he'll become a martyr to be replaced by another leader who will come along. True. Sort of. Bin Laden has unique skills to motivate and organize terror. His death or capture would weaken Al Qaeda, at least in the short run. The longer run is a little more complicated. There you can make an argument that the next generation may have equally skilled murderers. But in the short-run, forcing Al Qaeda to replace their best leaders with second-stringers makes us safer.

Discomfort Bred by Comfort

I am reading now, for the first time, George Eliot’s Middlemarch. It’s a splendid novel, set in a small English town circa 1830. (The novel was written in 1871-72.) Eliot’s works are chock-full of deep insights, all elegantly and smartly worded. Here’s a favorite of mine from Middlemarch. When I read it, I thought of those who today protest against globalization and commerce:

We may handle even extreme opinions with impunity while our furniture, our dinner-giving, and preference for armorial bearings in our own case, link us indissolubly with the established order.

The same point was made a generation earlier by the incomparable Thomas Babington Macaulay. He wrote, in his History of England, about the nineteenth-century Englishman’s deep affection for the beauty of the Scottish Highlands. Macaulay informed his English contemporaries that their affection for the Highlands was new; it emerged only after commerce and civilization tamed the Highlands and made them accessible to civilized people.

Indeed, law and police, trade and industry, have done far more than people of romantic dispositions will readily admit, to develop in our minds a sense of the wilder beauties of nature. A traveller must be freed from all apprehension of being murdered or starved before he can be charmed by the bold outlines and rich tints of the hills. He is not likely to be thrown into ecstasies by the abruptness of a precipice from which he is in imminent danger of falling two thousand feet perpendicular; by the boiling waves of a torrent which suddenly whirls away his baggage and forces him to run for his life; by the gloomy grandeur of a pass where he finds a corpse which marauders have just stripped and mangled; or by the screams of those eagles whose next meal may probably be on his own eyes. . . .

It was not till roads had been cut out of the rocks, till bridges had been flung over the courses of the rivulets, till inns had succeeded to dens of robbers . . . that strangers could be enchanted by the blue dimples of lakes and by the rainbows which overhung the waterfalls, and could derive a solemn pleasure even from the clouds and tempests which lowered on the mountain tops.

Bad data

The New York Times has a rather remarkable story by Edmund Andrews on the front page of the Business section of that august paper. The headline:

It's Not Just the Jobs Lost, but the Pay in the New Ones

Before critiquing the article, I should mention that I don't particularly credit the Bush tax cut for the recovery. If anything, Bush has raised taxes by increasing spending. He has simply pushed the bill into future years by running a deficit. But let's read on:

The stunningly slow pace of job creation, which sank to growth of just 32,000 in July, has provided new ammunition in an intense political debate over job quality.

Stunningly slow? Curious. Job growth was rather large in May and June, even after the revisions. I'll give Andrews the benefit of the doubt and assume he's referring to the last three years or so. Even then, "stunningly" is rather a loaded work for a news story.

For months, Democrats have said that the long-delayed employment recovery was concentrated in low-wage jobs that paid far less than those that were lost. White House officials replied that the available data failed to settle the matter one way or the other.

The data is still inconclusive.

At this point, we should see, WARNING: What follows will be a matter of opinion and deciding who to interview.

But the weakness in job creation and the apparent weakness in high-paying jobs may be opposite sides of a coin.

Wait a minute. I thought the data were inconclusive. The author has apparently decided that the assessment of the Democrats is right. He hedges with that word "apparent" in front of weakness. But where's the evidence that it's right?

Companies still seem cautious, relying on temporary workers and anxious about rising health care costs associated with full-time workers. Many economists say that over the long term, the most vulnerable positions are those at the low end of the wage scale that require fewer skills and are easily replicated.

Even now, at a time when a disproportionate number of new jobs appear to be lower-paying ones, there has been growth in some high-income occupations like accounting, architecture and software.

We are now four paragraphs into the article without a single fact about its central claim.

Yet the earnings gap between the highest-paid employees and the rest of the work force is still widening, as it has over most of the last 30 years. The trend is most striking in factories, which accounted for the bulk of job losses in the last three years and tended to pay above-average wages.

Could be. Not sure how reducing factory or manufacturing employment creates the "most-striking" example of inequality. But it could contribute to it. Does it? Can I please have a fact?

In contrast to previous recoveries, when companies rehired a large proportion of laid-off workers, manufacturers have added only 91,000 jobs this year, having eliminated more than two million jobs in the previous three years.

The largely permanent decline in manufacturing employment, which has been more acute after this recession than in previous ones, spans all levels from blue-collar workers through senior management. It has coincided with a bulge in the number of jobs in low-paying fields that are comparatively easy to enter: retail sales, hotel services and clerical work.

It's true that manufacturing employment has fallen dramatically in the last few years. I like the phrase "largely permanent." How can you know? Especially when manufacturing added 10,000 jobs in July, an awkward fact that is not mentioned. But I'm still waiting for a fact about pay rather than employment.

The ragged pattern of the recovery has given rise to the political debate, with Senator John Kerry, the Democratic nominee, saying that new jobs pay, on average, $9,000 a year less than the jobs that were lost.

I've heard him say that and I've wondered where the number comes from. It's a very large number. It's one thing to say that the new jobs are not as good as the old ones. Or that they pay less. I could believe those claims. But $9,000 less? Is it true? Seems very unlikely.

White House officials disagree, saying that such calculations are based on an erroneous comparison of median wages between industries that are expanding and contracting.

Is this really where the Kerry number comes from? I wish the reporter had gone to an unbiased source to critique or understand the Kerry claim. By relying on the White House to refute the claim, the whole thing looks like just another partisan dispute.

The main error, they say, is that even low-wage industries like retailers and fast-food chains hire high-income executives and managers.

If the White House is right that the $9,000 figure comes from looking at medians from expanding and contracting industries then the White House is right. It's not a meaningful number.

" McDonald's has C.E.O.'s and accountants, and investment banks hire janitors,'' said N. Gregory Mankiw, chairman of the president's Council of Economic Advisers. "Simply knowing what broad categories are rising and falling doesn't tell you anything about the jobs people are getting.''

But a growing number of analysts say the evidence increasingly suggests that the current recovery has indeed been tilted toward lower-paying jobs. Industries ranked in the bottom fifth for wages and salaries have added 477,000 jobs since January, while industries in the top fifth for wages had no increase at all, according to an analysis of Labor Department payroll data by Economy.com, an economic research firm.

"Since employment peaked, we've lost many more higher-paying jobs than lower-paying jobs,'' said Mark Zandi, chief economist at Economy.com. "In recovery, we've created more lower-paying jobs than higher-paying jobs."

Though acknowledging that the payroll data was inconclusive, Mr. Zandi said that the pattern had become firmer over the last month and that it was increasingly similar to what had been found in the Labor Department's household survey, which categorizes work by occupation as well as industry.

We are now 2/3 of the way to the end of the article, and well into the inside continuation on page C4. We have our first real fact. Since January, 477,000 jobs have been created in the industries in the lowest-paying quintile. None in the top quintile. None? Since January, all of the new jobs are in low-paying industries? That's hard to believe, so I called Economy.com.

They sent me the data. Their data show that since January, the lowest quintile has added 177,000 jobs and the top quintile, 135,000. Not an equal number to be sure, but not 477,000 vs. zero.

Here's my guess as to what happened. The reporter read the following lines from the report that Economy.com sent out with the data:

Employment gains during the past year have been measurably stronger in low wage industries than in high wage industries (see table). Of the 1.3 million jobs created since last June, approximately 60% are in low-wage and only one-third in high-wage industries. Moreover, this has not changed appreciably in recent months.

What does the word "this" refer to in the last sentence? What is unchanged? The pattern is unchanged that more jobs are being created in the lower-paying industries and fewer in the higher-paying ones. But I suspect the New York Times reporter misread it to mean that the number of jobs in the high-paying industries is unchanged, ergo, zero job growth in the high-paying industries.

I have a call into Mr. Andrews. I'll re-post if anything changes.

But here's what's amazing and a little bit frightening. This claim that no new jobs are being created in the highest-paying industries will become what Joel Best calls a "mutant statistic." Whether it's true or not, because it was in the Times, it will get quoted and cited as fact. I don't think it is. If I'm wrong, I'll let you know.

Do You Believe in Magic?

The Cato Institute's David Boaz has a superb op-ed in the August 3rd edition of the Los Angeles Times. I especially like the following insight:

But liberals and conservatives have more in common than you might think.

Both believe in government magic. And they want you to believe in it too. They want you to believe the president can be Superman, Santa Claus and Mother Teresa all rolled into one and that he can cure poverty and racism, keep kids off drugs and keep families together. Magical thinking is cute among children. But adults should know that the world is complicated and that legislative actions often fail, or backfire, or have unintended consequences or disappear into bureaucratic sinkholes.

This insight cannot be repeated too often. (Children seldom learn any piece of wisdom by hearing it only once.) In 1871, the great novelist George Eliot observed in her masterpiece, Middlemarch, that "there is nothing more thoroughly rotten than making people believe that society can be cured by a political hocus-pocus."
....

The great challenge is to make such mysticism disappear.

Almost as good as having a Blackberry

I'm listening to William Manchester's bio of Churchill on my commute. (The link will take you to Audible.com's version. Warning: I'm enjoying it greatly but it is only available in relatively low audio quality. Listen to the sample before you buy.) According to Manchester, London in 1875 had ten (10!) mail deliveries a day. Slightly more labor intensive than email. Such a system makes sense when labor is relatively cheap and people really want to stay in touch. Another interesting number—1000 people died a year in England's coal mines. Makes nuclear power look really safe, even in a week when an accident in Japan kills four people. By the way, the population of England in the last quarter on the nineteenth century was about 30 million.

Bad Recipe

Here’s a recipe for long lines, mediocre meals, and surly service at restaurants in Greece:

Officials from the Greek development ministry have been regularly checking menus at dozens of restaurants and cafes and cracking down on overcharging, as Athens readies for the Olympic Games in just over three weeks.

The restaurants and cafes cited had profit margins of between 82 and 588% on some products, well above the state-sanctioned legal limit of 45%.

(This item is from the July 27th edition of USA Today.)
………..
For those of you who’ve studied microeconomic principles, do the following easy exercise. Draw a supply and demand graph. Experiment with different prices – prices above equilibrium, prices below equilibrium, and the price at equilibrium. Then ask: at what price for this good or service is the amount that consumers actually acquire the greatest? That is, what price maximizes the quantity that consumers actually purchase and enjoy?

Modern times and the division of labor

When my oldest son was a little boy, he loved machinery—backhoes, bobcats, trucks and bulldozers. When workmen were repairing our streets or our sewers he would stand transfixed and watch for as long as we let him. One time, one of the workers, noting his interest, took him aside and said—When you grow up, you don't want to do this, stay in school as long as you can.

One of the great revolutions of the 20th century was the transition of our economy out of manufacturing and agriculture into the oft-derided service sector as the dominant source of employment. In 1900, agriculture accounted for 40% of employment. The rest was closely divided between service jobs and what the government classifies as goods-producing jobs—mostly manufacturing, mining and construction. Incredibly, service-producing jobs, mainly what we call service jobs, outnumbered goods-producing jobs for every year of the 20th century. But in 1900, it was close. Service producing jobs grew steadily and by early in the 20th century, around 1910, service-producing jobs outnumbered even agriculture. Manufacturing employment surged around WWII, but not enough to pass the service sector, and since 1950, the proportion of employment in service-producing jobs has grown steadily while manufacturing has steadily fallen.

My suspicion is that manufacturing jobs in a world of assembly lines and modern production techniques are less interesting at any give moment on the job than service jobs and so-called knowledge jobs, jobs in the IT sector or blogging or health care or retailing. That appeared to be part of the reason that backhoe operator gave my son the advice he did.

We have a sort of schizophrenia about manufacturing and other jobs that involve physical labor. Our culture romanticizes physical work as ennobling and views steel workers and backhoe operators as the salt of the earth. Yet in movies like Chaplin's Modern Times, the culture views assembly line work as dehumanizing and degrading.

The assembly line with its division of labor and concomitant repetitiveness is a great source of wealth along with disenchantment. One might think that the movement away from manufacturing discussed above has the virtue of allowing for less repetition and a more interesting work day. (It certainly makes it easier to check out the latest sports scores or make a plane reservation over the internet.)

I started thinking about the costs and benefits of specialization and the division of labor after reading the great 19th century economist, J.B. Say's thoughts on the division of labor. (Ended up there after Tyler Cowen over at Marginal Revolution mentioned the Cyclopædia of Political Science, Political Economy, and the Political History of the United States that was recently posted over at the Library of Economics and Liberty. Which led me to Say.

After talking about the virtues of the division of labor as a creator of wealth, Say turns to the drawbacks from specialization and even finds negative things to say about how the division of labor affects the ability of lawyers to surivive out in the real world.

A man, whose whole life is devoted to the execution of a single operation, will most assuredly acquire the faculty of executing it better and quicker than others; but he will, at the same time, be rendered less fit for every other occupation, corporeal or intellectual; his other faculties will be gradually blunted or extinguished; and the man, as an individual, will degenerate in consequence. To have never done any thing but make the eighteenth part of a pin, is a sorry account for a human being to give of his existence. Nor is it to be imagined that this degeneracy from the dignity of human nature is confined to the labourer, that plies all his life at the file or the hammer; men, whose professional duties call into play the finest faculties of the mind, are subject to similar degradation. This division of occupations has given rise to the profession of attorneys, whose sole business it is to appear in the courts of justice instead of the principals, and to follow up the different steps of the process on their behalf. These legal practitioners are, confessedly, seldom deficient in technical skill and ability; yet it is not uncommon to meet with men, even of eminence in this profession, wholly ignorant of the most simple processes of the manufactures they every day make use of; who, if they were set to work to mend the simplest article of their furniture, would scarcely know how to begin, and could probably not drive a nail, without exciting the risibility of every carpenter's awkward apprentice; and if placed in a situation of a greater emergency, called upon, for instance, to save a drowning friend, or to rescue a fellow-townsman from a hostile attack, would be in a truly distressing perplexity; whereas a rough peasant, inhabiting a semi-barbarous district, would probably extricate himself from a similar situation with honour.

In addition to being unfit for serious carpentry, I suspect many lawyers who specialize in the arcana of a particular niche of the law can find their work boring. Yet my biochemist father-in-law, has spent his entire career studying a single enzyme, Cytochrome P450 without losing his enthusiasm for research after decades of work. I wonder how long such specialization has taken place in science? Less than a century, surely. Such specialization is both the result of our wealth and the creator of it.

Inequality and the Boss

Bruce Springsteen weighs in on the Presidential election and the Bush tax cutin today's New York Times:

We granted tax cuts to the richest 1 percent (corporate bigwigs, well-to-do guitar players), increasing the division of wealth that threatens to destroy our social contract with one another and render mute the promise of "one nation indivisible."

Never mind that the tax cut was across the board, it is true that rich people got tax breaks, too. I like the self-effacing admission that he too benefited from it. Clinton used the same rhetorical flourish in his speech to the Democratic convention:

I almost sent them a thank you note for my tax cuts until I realized that the rest of you were paying the bill for it. And then I thought better of it.

So here's the puzzle. If Bruce and Bill think the tax cut was wrong, if they think that the division of wealth threatens to destroy the social contract, why don't they give the money away? They could give the money back to the Treasury. People donate money to the Treasury every year. I know it's weird but it happens. Or the rich who resent their tax cut could give it to their local soup kitchen.

One answer is that the rich are simply posturing. The other answer is that smallish gestures are inferior to grand public gestures. By refusing the tax cut in this manner you make it harder to get everyone to give up their tax cut and redistribute wealth more widely via new initiatives.

A public ceremony where wealthy people wrote checks to charities equal to their tax cut would have a lot more political bang for the buck than an op-ed in the New York Times. Go for it, Bruce.

Making the world smaller

We tend to romaticize manufacturing jobs and look down on service jobs. We associate the former with rugged steelworkers, grimy in their overalls, using a smelter. Service jobs don't produce anything, say the critics. On the surface, Federal Express merely moves packages around. But actually Federal Express does something quite extraordinary—they make the world smaller buy getting packages from here to there more quickly.

Cheaper long-distance does the same thing. In 1920, it cost $26 a minute to make a phone call from New York to Los Angeles. Today, it's virtually free as this article in today's Washington Post points out. But that $26 figure was in 1920 dollars. In today's dollars, the cost in 1920 was $287. Here's the chart from the Post article showing the long decline, in real and nominal terms of the cost of long distance:

That change in costs makes the world smaller. I can talk to my parents and brother and sister and old friends around the world as if they lived around the corner instead of being scattered around the country.

Another revealing chart would be the number of people who work in the long-distance business per call made. That number has plummeted as well which is merely the flip side of saying it has gotten cheaper. We've substituted technology for people and freed up the people who would have been necessary to create the billions of minutes we use to instead do other things instead.

This is just another example of the point made by my co-blogger Don Boudreaux that jobs are costs not benefits. The American economy is very good at creating jobs. The key question is what kind of jobs. Imagine keeping long-distance technology unchanged at its 1920 level. We'd have saved the jobs of all those telephone operators and made the world poorer and more isolated. We let those jobs go and created new jobs in all the industries we couldn't have dreamed of in 1920.

Ironically, the process of substituting technology for people is what creates our rising standard of living over time. It appears to be the opposite—surely we can't get richer as a people if we're losing jobs in the telephone industry—surely that makes us poorer. But it makes the nation as a whole richer to have cheap long-distance. The telephone operators who lose their jobs have to find a new job. Sometimes it will pay less because their skills may not be as useful in other industries that will arise. But their children and grandchildren inherit a richer world where people are closer together. Do that in industry after industry and you get a change in our standard of living over the last 100 years of something between ten and thirty TIMES higher.

Making the world smaller

We tend to romaticize manufacturing jobs and look down on service jobs. We associate the former with rugged steelworkers, grimy in their overalls, using a smelter. Service jobs don't produce anything, say the critics. On the surface, Federal Express merely moves packages around. But actually Federal Express does something quite extraordinary—they make the world smaller buy getting packages from here to there more quickly.

Cheaper long-distance does the same thing. In 1920, it cost $26 a minute to make a phone call from New York to Los Angeles. Today, it's virtually free as this article in today's Washington Post points out. But that $26 figure was in 1920 dollars. In today's dollars, the cost in 1920 was $287. Here's the chart from the Post article showing the long decline, in real and nominal terms of the cost of long distance:

That change in costs makes the world smaller. I can talk to my parents and brother and sister and old friends around the world as if they lived around the corner instead of being scattered around the country.

Another revealing chart would be the number of people who work in the long-distance business per call made. That number has plummeted as well which is merely the flip side of saying it has gotten cheaper. We've substituted technology for people and freed up the people who would have been necessary to create the billions of minutes we use to instead do other things instead.

This is just another example of the point made by my co-blogger Don Boudreaux that jobs are costs not benefits. The American economy is very good at creating jobs. The key question is what kind of jobs. Imagine keeping long-distance technology unchanged at its 1920 level. We'd have saved the jobs of all those telephone operators and made the world poorer and more isolated. We let those jobs go and created new jobs in all the industries we couldn't have dreamed of in 1920.

Why Bush will win

Zev Chafets claims in today's New York Post that Bush will win easily in November.

Calling a presidential race in August is risky, especially a race that's supposedly close. But no guts, no glory. Bush will beat Kerry in a walk. If I'm right, you read it here first.

Actually, I've read it in a few other places already. Ray Fair has a model that predicts presidential outcomes based on the state of the economy. His model, as of July, is predicting that Bush will get 57% of the popular vote. Fair's model has predicted five of the last six Presidential elections.

I have a model that successfully predicts the last THIRTEEN elections. It's a bit simpler than Fair's whose model relies on complex statistical analysis. My model is a little simpler. It's based on one variable, the answer to the following question: Which candidate would you most like to have a beer with?

Here's the way to think about the question. It's not like the question of who you'd like to have dinner with, Shakespeare, Moses, Jesus, Rasputin and Amelia Earhart so you could ask the really tough questions and find out what really happened. No, this about sitting with your buddies in a neighborhood bar and passing time.

Which candidate do you want to see walk through the door and join your group? Which candidate is going to add to the liveliness of the conversation, spice it up with some humor, get philosophical as the evening winds down and offer sympathy for your problems? Which candidate will be best at saying something witty or profound, where profound means profound in a bar, not in a classroom? Which candidate can be the life of the party and still make you feel good about yourself? Which candidate tells the best stories?

Bush or Gore? Bush. Clinton or Dole? Clinton, by a landslide. Clinton or Bush the elder? Still Clinton. Bush the elder or Dukakis? Bush. Reagan or Mondale? Reagan. Reagan or Carter? Reagan. Carter or Ford? This is the only tough one. Neither one really makes the cut. But give it to Carter for his accent. Nixon or McGovern? Nixon. Nixon or Humphrey? Nixon by a long shot. LBJ or Goldwater? LBJ in a cakewalk. Kennedy or Nixon? Kennedy by about a mile. Eisenhower crushes Adlai Stevenson twice. Generals always beat intellectuals. Story-tellers always beat earnest preachers who want you to eat your peas. Charmers beat dullards.

My model only goes back to 1952. My suspicion is Truman over Dewey but I don't know enough about Dewey.

Ironically, George W. doesn't drink. So he'd be hoisting seltzer or those awful no-alcohol beers. But I suspect most Americans would rather drink with him than with Kerry. I know, a lot of people hate Bush. But a lot of people hated Clinton, too. He had enough charisma for the non-haters to win two elections.

OK, I'm mostly kidding. But only mostly. Folksy likeability goes a long way in an election.

PS: Reader Ryan Peterson points out that in an Economist online poll of Americans, more people wanted to have beer (or coffee) with Bush (54%) than with Kerry (46%). Here's the article from the Economist that takes this likeability factor seriously. They use the "comfortable in his own skin" idea as one measure of this factor, which starts to get at something that actually may matter—the authenticity and assuredness of the candidate. Here's the page with the poll info. The poll was from July 22. Wonder how those numbers will change after both conventions.

Drug Prices

While the Democrats were touting the potential future benefits from stem cell research, a future I like (see previous post) there was a less encouraging moment during the convention for those of us who are optimistic about the future of our physical health. It came during Kerry's acceptance speech. It was a single line that I have not seen discussed.

Under our plan, Medicare will negotiate lower drug prices for seniors.

Yikes! I like low prices for seniors, too. Good idea. But if the government negotiates lower prices for seniors, you're on the road to price controls while pretending you're on the road to freedom. Budget pressures will force prices down, cut into pharmaceutical profits and reduce the incentives for future innovations. And by starting with lower prcies for seniors we'll encourage drug companies to keep working on drugs that eliminate crow's feet rather than Alzheimers. If we want the elderly to get lower prices, let's subsidize them. Let's give the elderly money. Let's speed up the regulatory approval process. But to make drug companies pay for cheaper drugs in the form of lower profits is a hidden way to get cheap drugs. The costs will be paid by our children and grandchildren who will miss out on innovations that will no longer be profitable. My longer take on the price of drugs is here.

Stem Cell Politics

Anne Applebaum has a nice piece in today's Washington Post where she explains the current regulatory environment for stem cell research. She writes about how the Democrats spoke last week as if stem cell research were illegal. While she is sympathetic to increased stem cell research, she points out that the current situation is not quite as bleak as it was painted.

Stem cell research is not, in fact, either illegal or unfunded: The federal budget in 2003 included $24.8 million for human embryonic stem cell research -- up from zero in 2000. Private funding of stem cell research, which is unlimited, runs into the tens and possibly hundreds of millions of dollars. The current, admittedly hairsplitting policy came about because Congress in 1995 passed a ban on federal (but not private) funding for any form of research that involved the destruction of human embryos, because it is a form of research many American voters dislike and don't want to pay for. After some important (privately funded) breakthroughs, the Clinton administration began looking for legal ways to bypass the ban, but never got around to paying for any actual research.

I haven't paid close attention to the stem cell debate. I assume that stem cell research, like cloning, is inevitable. It is very hard for the state to stop human curiosity. It can slow it down. It can decide not to fund it. It can make it illegal. But it is only a matter of time before we start playing with our genes. Many good and bad things will no doubt come of these efforts. But if most of the good accrues to individuals (a cure for Alzheimers, a child cloned after a tragic accident) and the bad accrues to our culture in intangible ways (hubris, a cavalier attitude toward the mystery of life, etc) then it's going to happen. I happen to think the good will outweigh the bad, but for those who disagree, the costs of stopping it will eventually be insurmountable. Stopping cloning for example, or genetic fiddling to improve human health, or genetically modeified foods that feed starving people will make the war on drugs look like an enormous success. Stopping research that will allow people to live longer, healthier lives will take too many policemen probing garages and basements along with every university lab and corporate research center.