Cafe Hayek

Pricing Water

The Washington Post weighs in on the impending ecosystems meltdown.  The Post story actually shows some skepticism.  Not, alas, over the assessment of impending doom, but rather on the report's suggestions that it might be useful to price some resources that are currently unpriced.  The story quotes Harold Mooney, one of the numerous contributors to the study, on environmental problems:

One way to address such problems, Mooney said, is to assign economic value to environmental benefits that many people take for granted. "We consider services free -- like clean water and pest regulation -- but they are not free," he said. "A number of services have a potential to get into the economic system that will help in making wise decisions."

And here we get the only skeptical note in the entire article:

Environmental advocates such as Nadia Martinez, a research fellow at the Institute for Policy Studies, a nonprofit think tank, applauded the report's findings but said she is concerned that governments could implement its market-based recommendations while ignoring its caveats. For example, she said, imposing a cost on clean water would disproportionately affect the poor.

Unfortunately, left omitted is the fact that not imposing a cost on clean water disproportionately affects the poor.  Because water is unpriced, there is insufficient incentive to provide it in the poorest parts of the world.  That means there is very little of it for the poor to enjoy and as a result, poor people around the world die from lack of water.  Here is one study that looked at the data rather than arguing about the morality of pricing water.  In that study, published in the Journal of Political Economy, the poor were disproportionately affected, but in the opposite direction from what worries the skeptic:

Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.

On Foreign Holders of U.S. Debt

Uncle Sam borrows a lot of money from foreigners.  Indeed, according to David Altig of the Cleveland Fed, “almost all of the federal debt issued by the U.S. government since 2001 has been accumulated by foreigners.”  (This quotation is from Tuesday’s Wall Street Journal’s Econoblog.)

Should we worry?  The Econoblog debate linked to above offers arguments both yea and nay.  In my view, there is indeed something to worry about, but this something is unconnected to the nationality of those who hold U.S. government debt.  Step back from the details and the jargon of this debate and ponder the fundamentals.

Assume for the moment that government does what’s right – that it, assume that elected officials are genuine public servants who, by and large, use government to maximize long-term “social welfare” (however you define that slippery term).  By assumption, then, the huge federal budget deficit is as close to being an optimal method of financing some portion of government spending as we imperfect humans can attain.  The programs made possible today by this deficit financing are, by assumption, worth their costs in whatever current and future activities that must be sacrificed to make these deficit-financed programs possible.

So if both the existing level of government spending is optimal and the method of financing this spending is optimal, what does it matter that some or all of the current budget-deficit is financed by foreigners?  Yes, this debt must be repaid, but that’s true regardless of the nationality of Uncle Sam’s creditors.  Tax revenues in the future must rise to repay this debt, and, hence, economic activities must be foregone as a consequence of repaying this debt.

Of course, government could repay this debt by instead cutting future spending or by printing money.  But no matter the method used to repay the debt, the nationality of the debt holders is irrelevant.

Indeed, if the government truly does what right, then open trade and the added wealth that this trade creates for both Americans and for foreigners trading with Americans expands Uncle Sam’s options.  He can choose spending and financing options that would otherwise be unavailable or irresponsible.  So it might well be true that Americans’ foreign trade enables government to borrow and spend more than it would if this trade were on a smaller scale.  But under the assumption I use here – namely, government behaves responsibly – any added spending and deficit financing are worth their costs.

The real problem – and I do believe that there is a real problem – is the fact that government does not behave responsibly.  It spends too much; it borrows too much.  And the wealthier our economy becomes, the greater the scope for government foolishness.  Fortunately for us, the American economy – more precisely, the global economy, of which Americans are a large part – is stupendously productive.  The wealth generated allows many foolish government policies to be undertaken without severe-enough ill consequences to put a halt to the foolishness.

The real problem is neither the nationality of America's creditors nor the size of the current-account deficit.  It’s government irresponsibility -- irresponsibility that results in excessive government spending and sub-optimal means of financing this spending.

There’s something surreal about serious people discussing serious proposals for how the government can solve these problems.  The vast, twisted set of political institutions that separate power from responsibility, and separate individual choices from individual consequences, is the ultimate source of whatever genuine problems exist – namely, here, outlandish government spending and excessive deficit financing.  Concerns about the current-account deficit or about the nationality of Uncle Sam’s creditors are red herrings.

It's nearly over

The human race is about to go extinct taking everything down with it.  Unfortunately, science has already died.

The headline in the Guardian:

Two-thirds of World's Resources 'Used Up'

Only a third left.  What does that mean exactly?  Let's turn to the article.

The human race is living beyond its means. A report backed by 1,360 scientists from 95 countries - some of them world leaders in their fields - today warns that the almost two-thirds of the natural machinery that supports life on Earth is being degraded by human pressure.

The study contains what its authors call "a stark warning" for the entire world. The wetlands, forests, savannahs, estuaries, coastal fisheries and other habitats that recycle air, water and nutrients for all living creatures are being irretrievably damaged. In effect, one species is now a hazard to the other 10 million or so on the planet, and to itself.

"Human activity is putting such a strain on the natural functions of Earth that the ability of the planet's ecosystems to sustain future generations can no longer be taken for granted," it says.

Pretty frightening stuff.  What's the evidence for this extraordinary pessimism at a time when life expectancies in almost every area of the world are at all time highs?

· Because of human demand for food, fresh water, timber, fibre and fuel, more land has been claimed for agriculture in the last 60 years than in the 18th and 19th centuries combined.

· An estimated 24% of the Earth's land surface is now cultivated.

· Water withdrawals from lakes and rivers has doubled in the last 40 years. Humans now use between 40% and 50% of all available freshwater running off the land.

· At least a quarter of all fish stocks are overharvested. In some areas, the catch is now less than a hundredth of that before industrial fishing.

· Since 1980, about 35% of mangroves have been lost, 20% of the world's coral reefs have been destroyed and another 20% badly degraded.

· Deforestation and other changes could increase the risks of malaria and cholera, and open the way for new and so far unknown disease to emerge.

Look at that last item again:

· Deforestation and other changes could increase the risks of malaria and cholera, and open the way for new and so far unknown disease to emerge.

That is not science.  That's scare-mongering.  Or wild-guessing.  Or something else.  But it's not science.  Is that from the journalist or the report?  Alas, it's more or less from the report.  Here's how the press release words it:

The degradation of ecosystem services could grow significantly worse during the first half of this century and is a barrier to achieving the UN Millennium Development Goals. In all the four plausible futures explored by the scientists, they project progress in eliminating hunger, but at far slower rates than needed to halve number of people suffering from hunger by 2015. Experts warn that changes in ecosystems such as deforestation influence the abundance of human pathogens such as malaria and cholera, as well as the risk of emergence of new diseases. Malaria, for example, accounts for 11 percent of the disease burden in Africa and had it been eliminated 35 years ago, the continent’s gross domestic product would have increased by $100 billion.

When you read the actual press release rather than the news story, you realize that we've left the realm of science and are somewhere else.  'Could grow worse.'  'Four plausible futures.'  (Only four?)  And they're worried about malaria's impact on GDP?  But we could have saved millions of lives from death by malaria by using DDT.  But that's bad for the environment.  So is that good or bad?

Look at the first two items:

· Because of human demand for food, fresh water, timber, fibre and fuel, more land has been claimed for agriculture in the last 60 years than in the 18th and 19th centuries combined.

· An estimated 24% of the Earth's land surface is now cultivated.

Sounds scary.  But why go back 60 years?  Is 24% the critical number where the whole system is going to collapse?  Why?  Where's the evidence?  I'm trying to find a reliable source on the web for what has happened since 1960.  Most sources suggest that land under cultivation has risen from 1.3 billion hectares in 1960 to about 1.4 billion hectares today.  (In the meanwhile, I'm searching for a reliable link.)  If true, not so scary.

Water could be a problem down the road.  It's a problem now around the world due to poorly run thugocracies around the world, but that's not what the report is referring to.  The world's fisheries are probably mismanaged.  But where's the evidence that we're standing on the edge of a precipice?  There isn't any.

I plan to sleep well tonight, though I am worried about the state of science.

Cato University

A truly worthwhile event is Cato University.  Founded and organized by Tom Palmer, Cato U. features superb speakers and an always-interesting group of involved, inquisitive, serious attendees.

I highly recommend attendance.  This year, all sessions will be in Washington, DC.  Here's more information.  (I especially recommend the session to be held at the end of April: my wife, Karol, is one of the speakers at that one.)

Trust, Faith and Confidence

The other day I had to get some important tax receipts to my accountant.  He's in St. Louis, it's getting close to April 15 and it's really important that they don't get lost.  So I sent them via FedEx.

The woman behind the counter was pleasant as I filled out the air bill.  And it dawned on me that I had no worries whatsoever that my package would arrive in St. Louis the next morning as promised.  I didn't worry that the woman might open the package after I left the office to see what I was sending.  I didn't worry that the man or woman who would touch the package next might open the package to see what was in it.  I didn't worry that the myriad of people who might come into contact with my package would be checking it out to see if there was anything in it worth stealing.

I also never worried for an instant that one of the people who would come into contact with my package might just decide it was too much trouble to deal with it and throw it away.

Total strangers I would never see.  What word best describes my lack of worry?  Was it trust?  Faith?  Confidence?  And what was the source of my contentment?  Was it simply the law of large numbers?  After all, that's what I rely on it when I park my car at the airport parking lot.  I know there's a chance someone will break into my car.  But I don't worry much about it.  There are lots of cars to choose from.  Mine is probably fine.  But if anything, the law of large numbers works against me at FedEx.  After all, if one package doesn't make it, what's the big deal?  Who's going to notice other than me.  Whoever steals it or throws it away could say it's hard to keep track of so many packages.  It fell off the truck.  It got lost in a crevice.  A dog ate it.

My lack of worry at FedEx is different.  It can't be trust.  There are too many people touching my package who I will never see.  How can I trust them?  I know nothing about them.  The woman behind the counter seemed like a decent enough soul.  I trusted her somewhat.  But I don't even think that's the right word my feelings about her.  But it's certainly the wrong word to describe her co-workers who brought my package safely to St. Louis.  I can't say I trusted them.  I knew nothing about them.

Faith?  Seems too open-ended or something.  Faith comes from having used FedEx before and knowing that they always get the job done.  There's a little of that.  But I wasn't even worried the first time I used FedEx.

Confidence seems like the right word.  Confidence born from an understanding of how the division of labor works in a modern economy.  What Hayek called the extended order of human cooperation.

You can see the miracle of the modern economy if you contrast FedEx with a different system.  Let's look at a different way to get a package to St. Louis.  I go down to a street corner and find an honest looking person.  I give this person my package and a bunch of $1  bills.  Here, I say.  Take this money and this package.  I know you probably don't need to go all the way to St. Louis yourself.  So take it part of the way and give the package and some of the money to the next person on the promise that that person will keep the chain unbroken.

How would I feel using that strategy?  I would be trusting the first person.  But the ones after that?  And would I have faith that my package would arrive?  Confidence?  Neither.  The package would be unlikely to arrive and I would certainly need a lot of $1 bills to raise my hopes to even a modest level.  In fact, it's not obvious that giving the first person more money rather than less would make much difference to the odds of the package arriving.

So what's different about FedEx?  On the surface, it's the same thing.  I'm expecting somehow that a lot of strangers are going to come through for me and keep their promises.  What's different?  What's different is the feedback loops that exist to insure performance.  In the case of FedEx there are consequences of failure.  In the case of the guy I find on the street corner, there are no consequences for failure.  FedEx tries to hire honest people.  They fire people who consistently lose packages or steal them.  They honor and reward people who do their job well.  And why does FedEx try so hard?  Who is FedEx?  Why does FedEx try so hard to keep its reputation intact?  Competition is part of the answer.  But there is more to it as well.

Even those feedback loops that keeps the FedEx employees honest work best when people feel guilty being thieves and slugs.  Does capitalism work best when peole are basically honest or does capitalism help create the virtues that make it work well?

The other remarkable part of the extended order of human cooperation is that FedEx delivered the package to St. Louis by 10:00 am for only $19.  Nineteen dollars!  What a lot of confidence can be bought for only $19.  What a pleasant and effective world we live in.

How the Minimum Wage Works

Warren Meyer over at Coyote Blog has a fascinating analysis from his real world experience of how the minimum wage actually works in practice.  Most economists think the minimum wage decreases employment by making low-skilled labor more expensive than it otherwise would be.  This in turn reduces the demand for labor, encourages the substitution of capital for labor, and reduces the viablity of the enterprises paying the higher wage.  True?  Well, it makes sense to an economist.  But Meyer actually explains the true microeconomics of the minimum wage so you can really see how it works.  Or maybe it's minimicroeconomics.  Whatever you call it, it's superb.

Bill James, Economist

I've always been interested in Sabermetrics, the application of statistics to baseball.  Bill James has been the modern pioneer in this area.  He has a tremendous level of intellectual curiousity and integrity.  I wasn't surprised to learn that he was an economics major in college as most of his work is fundamentally about hypothesis testing and trying to figure out how the world works.  Statistics in baseball play a similar role to statistics in economics.  Sometimes, they are used carelessly to advance a foolish theory and sometimes they are used to illuminate something hidden.  My favorite simple statistic in baseball is on base percentage.  Drawing a walk isn't glorious and outside of Barry Bonds, few fans have any idea simply from watching a bunch of games who walks a lot and who walks infrequently.  Yet getting on base via a walk is very valuable and underrated by the casual or even serious fan until on base percentage came along and got noticed.

Here is a very thoughtful interview with James taken from the Sons of Sam Horn web site.  A few highlights:

James T:  What's your opinion of the comportment of fans today as compared to throughout baseball history?

Bill James:  Well, what do I know about manners?   I’m pretty much an unreformed lout, myself.   
        There were a couple of books published in the late 90s, one by Robert Bork and one by a prissy woman named Gertrude something, bitching and moaning about the degeneration of civility in our culture. I read the books, but the thesis doesn’t ring true to me. These books create the impression that our culture is in rapid decay. But they create that impression by (a) selective editing of the facts—for example, pointing to “exploding” crime rates, when in fact crime rates have declined throughout most of the last century, were declining at the time the books were published and are declining now—and (b) simply ignoring most of the ways in which things are getting better. Forty years ago, tolerance for racism and violence was at levels it is hard to imagine today. Thirty years ago, comedians made jokes about rape. Twenty years ago, you went to a baseball game, people would drink themselves silly and fights would break out all over the park.
        At the same time, we have problems now that we didn’t have 30 years ago. Public vulgarity is rampant; that’s not a good thing, because for one thing it takes all the fun out of private vulgarity. In some ways people are ruder and less considerate than they used to be, I think. I don’t know how to sum up the gains and the losses, honestly, but I’m an optimist by nature. Things always seem better to me.

And:

James T: I remember announcers saying, for years, that in Tiger Stadium the Tigers were letting the infield grass grow very high.  Can teams really do that with impunity, create hay fields to protect their groundball staffs?

Bill James: I think so. . .there may be some MLB policy regulating the length of grass, but I’m not aware of it. Honestly, major league baseball—and all sports—would be far better off if they would permit teams to do more to make one park distinctive from another—even so far as making the bases 85 feet apart in one park and 95 in another. Standardization is an evil idea. Let’s pound everybody flat, so that nobody has any unfair advantage. Diversity enriches us, almost without exception. Who would want to live in a world in which all women looked the same, or all restaurants were the same, or all TV shows used the same format?
        People forget that into the 1960s, NBA basketball courts were not all the same size--and the NBA would be a far better game today if they had never standardized the courts. What has happened to the NBA is, the players have gotten too large for the court. If they hadn’t standardized the courts, they would have eventually noticed that a larger court makes a better game—a more open, active game. And the same in baseball. We would have a better game, ultimately, if the teams were more free to experiment with different options.
        The only reason baseball didn’t standardize its park dimensions, honestly, is that at the time that standardization was a dominant idea, they just couldn’t. Because of Fenway and a few other parks, baseball couldn’t standardize its field dimensions in the 1960s—and thus dodged a mistake that they would otherwise quite certainly have made.
         Standardization destroys the ability to adapt. Take the high mounds of the 1960s. We “standardized” that by enforcing the rules, and I’m in favor of enforcing the rules, but suppose that the rules allowed some reasonable variation in the height of the pitching mound? What would have happened then would have been that, in the mid-1990s, when the hitting numbers began to explode, teams would have begun to push their pitching mounds up higher in order to offset the hitting explosion. The game would have adapted naturally to prevent the home run hitters from entirely having their own way. Standardization leads to rigidity, and rigidity causes things to break.

And:

James T:  Does your general approach to these issues come from your economics training in college?

Bill James: My economics training was very useful, yes. It had tremendous impact on me, but I have difficulty explaining how.
        Economics is fundamentally concerned with value—what is the value of a wingding, what is the value of a plate of chicken fingers, what is the value to society of clean air? And my work is fundamentally concerned with value—what is the value of defense as opposed to the value of offense, what is the value of a walk as opposed to a hit, what is the value of a 23-year-old star as opposed to the value of a 28-year player of the same caliber? So the ways of thinking about problems are often very much the same.

James T: Was the way of thinking taught to you in your KU economics courses so different from the way you thought entering school?

Bill James: Long before I entered college, I was thinking about the problems that I still think about today. What the economists did was to show me new options for working through those problems. You understand that these are numbers pulled out of the air, but I might say that, if I was worrying about quantifying the impact of first base defense, then before I went to college I might have been able to figure out five ways to think about the problem, and after I went to college I might have been able to figure out 105 ways to think about the problem. Of those other 100 ways to think about the problem, maybe 20 were shown to me by statistics or math professors, and maybe 15 were shown to me by psychologists, and maybe 15 were shown to me by historians, but probably 50 were explained to me by economists. So. . .yes, my way of thinking about the problems was very, very different after I finished school than before I started it, point a, and, point b, the economics classes had a great deal to do with that.

Smarter than the Average Bear

Don’t miss Bryan Caplan’s clear and important explanation of how averages can be very misleading.

Bryan's post reminds me of an argument that I encountered years ago – I forget now who made it – about immigrants and education.  The argument was that immigrants reduce the average level of education in the U.S.  The clear point of this argument was to bolster the case against immigration.  A lower average level of education, after all, is worse than a higher average level of education.  Immigration’s negative effect on the average level of education in the U.S., it was implied, is a cost of immigration.

But clearly, although an illiterate and totally uneducated immigrant who moves to the U.S. does lower the average level of education among people living in the U.S., this immigrant does nothing to any individual’s level of education.  I retain my PhD and all the knowledge that I accumulated over the years.

I use average height to explain to my students the problem with taking averages at face value.  Suppose the average height of my class of 200 students is calculated and turns out to be 5’8”.  Then let Yao Ming walk into the classroom.  Because he is 7’6” tall, he will increase the average height of people in the classroom – but do nothing to the heights of any individual in the classroom. 

Trade or Fade

A new paper by Richard Horan, Jason Shogren, and Erwin Bulte, forthcoming in the Journal of Economic Behavior and Organization, argues that neanderthals were done in by free-trading homo sapiens. Here’s a summary. (Note: this summary gets the journal’s name wrong.)

Neanderthals failed to survive after humans entered their territories in large part because neanderthals were not innovative and had no significant division of labor and trading relationships.

So, we can with more accuracy than ever call protectionists and others who would keep market forces from improving the human lot "neanderthals."

I thank my good friend Ed Grass for alerting me to the Horan, Shogren, and Bulte article.

The Arithmetic Fallacy

Suppose you want to create jobs in your society.  Does it seem logical that to create more jobs, you need to restrict the effort of the people who already have jobs?  Well, sort of.  If it currently takes 100 people to do a certain task, then cutting their work effort in half would then require 200 people to get the job done.

The logic at first glance seems pretty appealing.  On a certain level, it seems undeniable.  Yes, there might be problems in monitoring how hard people work.  But you can see the surface appeal of the basic proposition.  It's just basic arithmetic.  Half of 200 is 100.

Doubts start to creep in when you wonder about whether the amount of work being done would stay constant if you had to pay twice as many people.  And then there's the question of wages.  Would they simply fall in half?  After all, there are costs related to having another employee regardless of how much they work—record-keeping and maybe other fixed costs.

Maybe cutting work effort in half wouldn't double the demand for labor after all.  Maybe it would reduce the demand for labor.  For example, if you weren't allowed to cut wages in half, then legislation that cuts work effort in half would actually make workers less attractive.  It would create an incentive to find different methods of production that use machines instead of labor.

What seemed so obvious at first to be undeniably true because of arithmetic—cutting the amount of work effort in half would seem to require doubling the number of workers—actually turns out to be false.  So what would you call this fallacy?  The arithmetic fallacy.  Or maybe the vertical demand curve fallacy.  Or maybe the Ceteris isn't Paribus Fallacy.

Whatever we should call it, the French seem to have discovered.  After a five year experiment, they have repealed the mandatory 35-hour work week which by putting a ceiling on hours of work was supposed to have increased the number of jobs in France.  The AP reports:

French lawmakers effectively abolished the country's 35-hour work week Tuesday by allowing employers to increase working hours — and pay — as the country struggles with high unemployment and stagnating living standards.

President Jacques Chirac's government has tried to sell the reform to voters as an opportunity to "Work More to Earn More," but many remain unconvinced.

Work more to earn more.  What an intriguing idea!

Many French workers have become accustomed to their longer holidays and regular weekdays off, and a recent survey by polling agency CSA showed that 56 percent of salaried employees oppose the reform — although jobseekers, retirees and unskilled workers approve.

Yes, they would.

Order Defined in the Process of its Emergence

Word for word, the most insightful thing I’ve ever read is James Buchanan’s 1983 comment on Norman Barry’s essay on spontaneous order.  This comment has since been published as a (very) short article under the title “Order Defined in the Process of Its Emergence.”  Here’s a link.

I think of Buchanan’s dazzling little article whenever I reflect on the question “why do so many people so readily believe that government is an appropriate institution for solving real and imagined ills?”  Of course, there are many reasons – some better than others – for why people are so ready to rely upon government.  But one of the deepest reasons is suggested by Buchanan’s article.

The very act of framing issues or describing problems as “social” entails thinking of society (usually in the form of a country) as the relevant unit upon which analysis is to be directed – as the relevant unit upon which corrective action is to be taken.  Once this step is taken, it’s easy to stumble into the presumption that action must be taken by government, for government is the only institution that claims for itself the authority and the ability to act on society as a whole.

The idea of society being “the result of human action but not of human design” is extraordinarily difficult to grasp.  We humans anthropomorphize so many things, it’s no surprise that we anthropomorphize society – that we think of it as a relevant and distinct unit with clear boundaries, with a life of its own, with purposes of its own – a distinct unit deserving and demanding attention to itself as a whole.

We talk, for example, about the U.S. unemployment rate.  Without dismissing this concept as irrelevant – for I emphatically do not believe it to be irrelevant – it strikes me as too easy to slip from worrying about the rate of unemployment of people residing within the boundaries of this place we call the U.S. into the notion that the best way to solve this problem is to act on the country as a whole.  It’s a problem spoken of as afflicting the nation as a unit; therefore, the solution, if one exists, must be to treat the unit.

Looked at differently, if I’m an employed American and I learn from, say, a CNN report that the U.S. unemployment rate is distressingly high, the problem is somehow mine, or part mine, even though I'm still happily employed.  All problems with “the United States" are somehow, at least in part, my problems, too, because I’m a citizen of the United States.

My powers of exposition are far inferior to those of Jim Buchanan.  Read his article.

Klein's Critique of Thaler & Sunstein

My new colleague Dan Klein -- who, I'm thrilled to report, will join George Mason University's Economics faculty in August -- offers this penetrating critique of Richard Thaler's and Cass Sunstein's notion of "libertarian paternalism."  (I agree with Pejman Yousefzadeh, at the always-insightful Pejmanesque, that this term is evidence of impressive chutzpah.)

Thanks to Larry White, over at Division of Labour, for reminding me of Dan's essay -- an essay that goes far deeper into the problems with "libertarian paternalism" than I attempt here.

You Choose

The assault on choice continues. See this story in today’s New York Times. This paragraph gives a good flavor of the entire article:

[University of Chicago economist Richard] Thaler and Cass Sunstein of the University of Chicago Law School suggested that it is proper for government, or an employer, to set boundaries to choice to achieve desired social objectives, an approach they call "libertarian paternalism."

What are the "desired social objectives"? How are they chosen? The range of options – from among which the "desired" ones are to be chosen – is vast. Do our "desired social objectives" include absolute income equality among families? Zero rates of divorce? Reducing the number of abortions? Curing cancer within ten years? Putting a man on Mars? No more petroleum imports? Reducing air pollution nationwide by 10% annually? 25% annually? 50% annually? Eliminating the trade deficit? Completely eliminating tobacco consumption? Reducing alcoholism by 5%? By 30%? TiVo in every family room?

Talk about a superfluity of choices! And whichever ones are selected will apply to us all, as a society. Because government will be entrusted to direct us all to pursue many of these "social objectives," we’d better make sure that the process for choosing which "social objectives" to pursue is pretty darn fool-proof. After all, what if we err in choosing the best set of "social objectives"? Or what if government inadvertently misdirects us toward pursuing some "social objectives" that are not among those truly chosen? We’re stuck – for there’s less individual, decentralized experimentation going on that can alert those of us on the wrong track to switch to a better track.

....

Elsewhere in the New York Times story, the writer says that "empirical studies have found that people, regardless of intelligence, do not always choose well."

Gee. People don’t always choose well. Are empirical studies needed to determine such a fact? Does any respectable school of economics, theory of psychology, or political philosophy rest on the assumption that people choose well always?

One vital theory of choice was explained by Kenneth Arrow. Whatever the problems with individual choice, they are small beer next to those that afflict collective choices.

....

Also on this topic, Cafe Hayek's own Russ Roberts debated Barry Schwartz last week on NPR.

Supporting Unsubsidized Stem-Cell Research

Boston University economist Jeffrey Miron has an excellent op-ed in today’s Boston Globe. In it, he argues that stem-cell research is worthwhile and ought to be legal – but that government subsidies to such research undermine the effectiveness of scientific research using stem-cells, as well as public support for keeping this research legal.

Miron also backs his case with the plausible claim that the profit-potential of successful stem-cell research means that the public-goods argument for government subsidies on this front is especially weak. He reports that "A research team at Harvard University, for example, has recently produced 17 new stem cell lines using funding only from private sources."

Read the entire op-ed.

My Nonchalance About the Trade Deficit

I’ve received 32 e-mails so far in response to my posts (here, here, and here) in which I argue that Warren Buffett misunderstands the trade deficit.  I continue not to worry about the trade deficit.

One correspondent asks about dollars in the hands of foreigners: “doesn’t the supply of dollars to be changed in foreign currency lower the exchange rate of the dollar?  If so, the trade deficit really is something to worry about for the U.S., isn’t it?”

No.  The trade deficit is nothing to worry about.

First, a growing trade deficit for the United States can cause the dollar’s exchange rate to fall, but it doesn’t necessarily do so.  Let’s assume for the moment, however, that the price of the dollar in foreign currencies does indeed fall.  Good or bad for Americans?

In a myopic sense, it’s bad, for each dollar now buys fewer imports.  But in a fuller, longer-run sense it is neither bad nor good in and of itself.  The price of the dollar, like all prices, reflects underlying realities.  The ‘right’ exchange rate is the one that reflects as accurately as possible these underlying realities.

If foreigners find themselves holding too many dollars relative to their demand for dollar-denominated goods, services, and assets, the dollar’s exchange rate will fall.  The lower exchange rate will decrease American imports and increase American exports, reducing America’s current-account deficit.

I view such an occurrence as being neither good nor bad.  Of course, it might reflect deeper problems with the American economy (such as an inflationary monetary policy), but it might also reflect nothing more awful than changing tastes and circumstances abroad.  Either way, there’s nothing suspect about the open trade that led foreigners to hold so many dollars that the dollar’s exchange rate falls.

But as mentioned above, a U.S. current-account deficit will not necessarily lead to dollar devaluation.  It could well be that the American current-account deficit is itself the result of high foreign demand for dollars.

Take the simplest example.  Suppose that (for whatever reason) foreigners conclude that holding dollars is now a better investment than they’d previously thought.  So they seek more dollars to hold.  How do they get these additional dollars?  By selling more things to Americans.  When foreigners increase their sales of goods and services to Americans and then hold on to the dollars they earn from these sales (rather than spend these dollars on American goods and services), the U.S. current-account deficit increases.  But there’s no downward pressure on the price of the dollar.  The very reason the current-account deficit rose is because the dollar is now in higher demand abroad.

Or suppose that foreigners’ demand for American real-estate increases.  Needing dollars to buy this real-estate, foreigners sell more goods and services to Americans and spend their extra dollar earnings on American real-estate.  In consequence, The U.S. current-account deficit rises, but the extra dollars earned by foreigners are not flooding foreign-exchange markets.  They’re back in the U.S., having purchased American real-estate rather than goods and services.

Food for Thought

Several students at Georgetown University staged a hunger strike to shame the University into raising the wages it pays to its janitors. Today that strike ended when the University agreed to increase janitors’ wages and fringe benefits.

I have nothing against Georgetown U. raising the amount it pays to its janitors. But the full picture of this little episode is different than the cropped snapshots that I see in the newspapers and hear on the local radio stations. The pop image is of selfless, concerned students making a noble sacrifice to help voiceless, hapless janitors get a better deal from a penny-pinching University bureaucracy.

This pop image is distorted.

Why was the pre-strike janitorial wage as low as it was? Answer: because Georgetown University discovered that, at that wage, it got as many janitors as it needed, of sufficient quality, to perform the desired cleaning services. To pay more would have been an act of charity to the janitors and not a act of commerce.

Now there’s nothing wrong with charity; I applaud it (when it’s done wisely). But why, in this case, did the hunger-striking students single out Georgetown University as an alleged malefactor? Why was the janitors’ employer targeted for its failure to extend charity?

Why didn’t the hunger-strikers demand that George Mason University or Catholic University extend charity to Georgetown University’s janitors? Or why didn’t these strikers demand that all merchants in Northwest DC extend charity to these janitors? Why didn’t the strikers give their own money as charity to the janitors? (They’re students, you say; so they don’t have much extra cash. Well, they can take out loans to give charity today to the janitors and then work after graduation to repay these loans.) Or why didn’t these hunger-striking students demand that Georgetown University increase its charitable contributions, not to its relatively well-off janitors, but to seriously poor people in sub-Saharan Africa?

I’m not being flippant. I’m quite serious. Because Georgetown University is no monopsonistic buyer of janitorial services, it must compete in the market to buy these services. The wages it pays for its janitors are, therefore, competitive. Paying anything more than these wages to secure the desired number of janitors is, therefore, charity. And while there’s nothing wrong with Georgetown University extending charity to its janitors (or to anyone else), there’s also nothing obligatory about it. The fact that Georgetown paid its janitors what it did was not, contrary to the hunger-striking student’s claims, a moral breach.

Inflation and Quality

Suppose a hotel chain, such as Marriott, changes the sheets it uses on its beds from 200-count polyester/cotton mix sheets to 300-count pure cotton sheets. Suppose also that consumers respond positively to this change, allowing the hotel to increase its average per-night rate by $15.

How does this quality-improvement-related price hike factor into official calculations of the rate of inflation? How should it factor in? Virginia Postrel offers a nice discussion in her column in today’s New York Times – which closes with the admission by an economist at the Bureau of Labor Statistics that measuring inflation "is more of an art than a science, unfortunately."

Can There Be Too Much Choice?

Do we moderns suffer from an over-abundance of choice?

Swarthmore College's Barry Schwartz says yes; Cafe Hayek's Russ Roberts says no.  Here's their discussion that aired this morning on National Public Radio.

GMU Law -- Impressive!

The Social Science Research Network just released its ranking of U.S. law schools, based on the number of downloads of their faculty's papers since March 1, 2004.  Here's it is:

  1  Harvard University - Harvard Law School
  2  Stanford Law School
  3  University of Chicago - Law School
  4  Columbia University - Columbia Law School
  5  University of California, Los Angeles - School of Law
  6  University of Texas at Austin - School of Law
  7  George Mason University - School of Law
  8  University of California, Berkeley - School of Law (Boalt Hall)
  9  Yale University - Law School
10  University of Virginia - School of Law
11  George Washington University - Law School
12  Georgetown University Law Center
13  New York University - School of Law
14  Vanderbilt University - School of Law
15  University of San Diego - School of Law
16  University of Pennsylvania - School of Law
17  University of Illinois at Urbana-Champaign - College of Law
18  Boston University - School of Law
19  University of Michigan at Ann Arbor - Law School
20  Fordham University - School of Law

Note carefully number seven -- none other than the George Mason University School of Law.  This impressively high ranking is further evidence that entrepreneurial scholarship pays -- that it pays to do scholarship that's iconoclastic and that doesn't grovel and try to imitate what it thinks scholars at elite schools are doing.

Congratulations to Dean Dan Polsby and his splendid and first-rate faculty, students, and staff!

Why Do Foreign Suppliers Accept Dollars?

Hall of Record’s Bruce Hall rejects my nonchalance about the trade deficit in favor of Warren Buffett’s deep anxiety over it.  (See also this other of my posts.)

Mr. Hall argues that importing goods and services “from a country 8,000 miles away … unless the equation is balanced by that country buying goods and services from the U.S. …there will ultimately be a negative economic impact as the U.S. losses it’s [sic] ability to generate wealth internally.”

The reason Mr. Hall uses the example of a country 8,000 miles away is to distinguish imports from such a country from the case in my earlier example, in which I imported services from my Canadian next-door neighbor.  Like me, Mr. Hall isn’t bothered by imports from someone who lives close to the U.S.: "The Canadian across the river is likely to use his newfound income to purchase goods or services from the area [presumably the U.S.].  The economy of the area is infused with income and spending that enriches the area.”

But unlike me, Mr. Hall sees the example of the close-in Canadian supplier as being of little relevance to the case of importing goods from distant countries: “The purchase of goods from a country 8,000 miles away that does not reciprocate, brings goods into the country while moving the wealth generated from production out of the country.”

I respectfully disagree.  I continue to see no difference between importing goods from across the river and from across the ocean.

Let’s use India as an example of a distant country from which Americans import goods and services.  The Indian supplier sells (say) textiles to Americans.  Americans pay for these textiles with dollars.

Why does the Indian supplier accept dollars in return for his valuable merchandise?  The reason is obvious; it’s the same reason that Mr. Hall, and I, and everyone else accepts dollars: because he knows that he can use these dollars to buy things that he fancies.  That’s the only reason.

He might want to buy consumer goods or services; he might want to buy producer goods or services; he might want to buy real-estate, equity shares, or debt instruments.  No matter.  He is surely no more enamored of dead American statesmen than I am – and as much as I admire George Washington and Ben Franklin, I don’t accept currency sporting their portraits because I long to gaze at engravings of their faces.  I accept dollars only because I aim to spend these dollars.

The same is true of the Indian textile supplier no less than it is true of the Canadian who mows my lawn.  The fact that the Indian lives thousands of miles away doesn’t mean that different reasons motivate his willingness to accept dollars in exchange for his products.

In short, Mr. Hall is right that the Canadian will spend his dollars in the U.S. But so, too, will the Indian.  (Yes, yes; the Indian might do so indirectly – by converting his dollars to rupees.  But whoever gives him valuable rupees in return for his dollars does so only because that person knows that the dollars are exchangeable for dollar-denominated goods, services, and assets.)  Foreigners accept dollars because they eventually want to spend these dollars on U.S. output or assets.

And, yes, it’s also true that foreigners can hold dollars indefinitely, just as Americans can.  But even if foreigners practice the most extreme form of not spending their dollars – say, burning them – this would be not bad news, but good news for the U.S. economy.  But that’s another post.

No Measly Achievement

Buried in the lower left-hand corner of page A13 in today's New York Times is this small item from Reuters' news service; I quote it in its entirety (no link available):

No More Rubella   Rubella, a virus that once caused tens of thousands of birth defects and deaths in a single outbreak, has been eliminated from the United States, health officials say.  But Americans must still vaccinate their children, and pregnant women must still ensure they are immune because the disease exists elsewhere, the Centers for Disease Control and Prevention said.  The agency said that in 2004, nine rubella case were reported in the United States, all originating in other countries.  Rubella, also known as German measles, is a usually mild viral infection that causes fever and rash, but early in pregnancy it can cause birth defects.

Eliminating rubella from our midst isn't quite as significant as the earlier elimination of small pox, or of the virtual elimination of polio.  But it is surely very good news.  Thousands upon thousands of people who otherwise would suffer their whole lives with birth defects are, because of this achievement, enjoying lives that are normal and healthy.  This news is wonderful indeed.

But who are these people?  No one knows.  They themselves don't know.  They're just ordinary people like you and me, with their own joys and concerns, who haven't the slightest idea that they would have been victims of rubella had this virus not been eliminated from our population.

And how does this achievement show up in official measures of our standard of living?  How do the now-oh-so-hip 'happiness studies' measure our benefit from this achievement?

Our prosperity pool is today several drops more full than it was just a few years ago when some Americans still contracted rubella.

Super-wisdom

Thomas, my seven-year-old son, loves Superman.  For the past three years, he has watched the Christopher Reeve Superman movies repeatedly.  Like me, he’s especially fond on the very first one.

Last year, my mother bought for him a VHS tape of the 2000 re-issue of the first Superman movie starring Christopher Reeve.  This re-issued version contains some scenes left out of the original release.  One of these scenes has established itself as among my very favorite in all of the movies I know.

The scene takes place immediately after Superman first reveals himself to the world – just after he saves Lois Lane from falling to her death from a crashed helicopter – just after he captures a jewel thief and other criminals – just after he prevents Air Force One from crashing.

In the scene, he is in his Fortress of Solitude talking to his father, Jor-El, played by Marlon Brando.  Jor-El is disappointed that Superman is revealed to the world but, given that it’s done, he has advice for his son on how to proceed.  He immediately advises Superman that he, Superman, must still retain his disguise as Clark Kent.

“Why?” asks Superman.

“The reasons are two,” replies Jor-El thoughtfully.  "First, even you cannot serve humanity twenty-four hours a day.  Your help would be called for endlessly, even for those tasks which human beings could solve for themselves.  It is their habit to abuse their resources in such a way.”

....

Suppose government did indeed possess superhuman abilities (as too many people seem to believe) -- abilities wisely and effectively to fund scientific research, fix minimum wages, fight wars, redistribute wealth, run schools, fund health care, operate a pension plan, and on and on and on.

   

Would we not still demand too much of this super-creature?  Would we not abuse our access to its powers -- say, entreating it to police against steroid use by a minuscule portion of the population and, as a consequence, deflectiing it from tackling other problems that are more pressing?  Would we feel entitled to pass off our own problems -- even our own small problems -- onto the extraordinarily-powerful-but-not-quite-almighty state, with the result being that our own individual powers wither and become sub-human?

It Ain't Free. It Ain't Fair. It Ain't Healthy.

Among the finest articles ever written by my formidable colleague and co-blogger Russ Roberts is this essay, originally appearing ten years ago in the Wall Street Journal, on the problems that arise when decisions to consume are separated from decisions to pay. If you’ll pay a substantial share of the cost of whatever it is I choose to consume, I’ll choose to consume more than I would if I were responsible for paying my full consumption bill.  In short, if you're footing most or all of my consumption bill, I'll consume irresponsibly.

The point seems to me to be incontestably correct.

And yet, many Canadians continue to fancy themselves "lucky" to be saddled with such a system for providing their health care.  Read the words of the Canadian lawyer quoted in this report. Go figure.

How on earth can a system that invites consumers to treat a scarce good as if it were free possibly work? Isn’t it inevitable – isn’t it utterly unavoidable – that any such system will suffer dysfunctions and troubles that make consumers worse off rather than better off? The story linked to above details some of the predicable maladies now infecting Canada’s insanely stupid health-care system.

....

Thanks to Brian Summers for alerting me to this report on the state of health-care provision in Canada.

Red-Letter Wisdom

Here are wise words from Nathaniel Hawthorne's The Scarlet Letter:

Neither the front nor the back entrance of the Custom-House opens on the road to paradise.

The Obesity Tsunami

Being fat isn't good for you.  We know that being very fat is very bad for you.  I don't think we know much about being a little bit overweight.  According to a story in yesterday's Washington Post, though, we have begun to quantify just how bad obesity is for our health:

Obesity has started to erode the gains Americans have made in extending their life spans and will stall the long trend toward increasing longevity unless the nation takes aggressive steps to slim down, researchers said yesterday.

 

    

Illnesses caused by obesity are already shortening the average U.S. life by at least four to nine months -- greater than the impact of car accidents, homicides and suicides combined -- a first-of-its-kind analysis has determined.

That's pretty scary.  And there's a nice chart to summarize the findings.  It gives the whole exercise a nice scientific gloss.

Within 50 years, if the trend is not reversed, obesity will cut the average life span by at least two to five years, which would exceed the effects of all cancers, the researchers estimated. That could overtake all gains from healthier lifestyles and medical advances and cause longevity to plateau or perhaps decline, they projected.

Scarier still.

    

"The take-home message is that obesity clearly needs to be considered in an entirely new light -- it is far more dangerous than we ever thought," said S. Jay Olshansky, a University of Illinois demographer who led the study in today's New England Journal of Medicine. Several other researchers agreed, saying the finding that obesity is actually undermining longevity should be a wake-up call.

I'm not so sure, at least based on a summary of the findings that we find on the second page of the article:

If obesity were magically eliminated, the overall life span would be at least one-third to three-quarters of a year longer, they found.

At first glance, that isn't much of a wake-up call.  I'm supposed to cut back on ice cream for 50 years in order to have a few extra months when I'm 80?  Just to make sure I'm sufficiently worried, here come another expert quoted in the article:

"These results are stunning and reinforce the enormous toll that obesity is taking on the health and happiness of the population," said Kelly D. Brownell, who directs the Center on Food Policy and Obesity at Yale University.

Stunning?  Enormous toll?  Happiness of the population?  I wonder if the Center on Food Policy and Obesity at Yale has any vested interest in exaggerating the seriousness of this problem.

 

Other researchers, however, said the underlying assumptions were excessively pessimistic. The study assumed, for example, that everyone who is overweight will suffer health problems.

 

    

Whoa.  The study assumed that "everyone who is overweight will suffer health problems?"  What the reporter should have asked at this point is the definition of overweight.  And the definition of health problems.  And how those problems were used by the researchers to establish shortened life expectancy.  At this point we hear from the only skeptic who is quoted in the article.

    

"I don't think this is based on solid, scientific ground," said Glenn A. Gaesser, a professor of physiology at the University of Virginia who frequently questions the impact of obesity. "It's nonsensical, really."

 

 

    

Notice that he's identified as a professional skeptic.  His evaluation, that it's "nonsensical" is pretty harsh.  But since we don't learn why he feels that way, there's no way of knowing if his skepticism is reasonable.  So let's hear from the other side:

    

But the researchers said their estimates were conservative in several ways, including the fact that they focused exclusively on adults. The true impact is likely to be much greater as obese children age and begin suffering elevated rates of diabetes, heart disease and cancer, they said.

    

"It's sort of like a massive tsunami heading towards the shoreline," said David S. Ludwig, an obesity expert at Harvard Medical School and Children's Hospital in Boston who worked with Olshansky. "It's going to peak in a massive public health crisis."

This is a low point in the history of scientific discourse.  "It's sort of like a massive tsunami"?  Sort of like?  What does that mean?  And it's actually nothing like a massive tsunami.  The essence of a tsunami is that it's a force of nature that comes out of nowhere and gives you no chance to run or hide.  Obesity, to the extent it's a problem, is a problem of our own making and our own choice.  It's not a virus or a tidal wave. It's not a contagious disease.  It's not an epidemic  or plague.  It's something we do to ourselves and if we choose, we can avoid. Some of us can avoid it easier than others.  But it's a crisis of our own making.

When the authors of a study call the problem of obesity a tsunami, I know there's something else going on rather than a quest for scientific truth.  I'll try and get the original study from the New England Journal of Medicine or from one of the authors and see what I can find about the methodology.

Politicians and Seven-Year-Olds

I got a haircut yesterday.  When I got home, I asked my kids whether the haircutter should charge men and women the same prices.  My seven-year old immediately answered yes.  Why, I asked.  His answer: charging different prices would be unfair.  My two older children, ten and twelve, were wary.  They know a trick question when they hear one.  We turned to the question of what the likely consequences of a law that would require charging men and women the same prices.  My ten year old worried whether the stylist cutting a woman's hair might do a poor job in order to save time.  My best guess is that it would mean the end of unisex hair salons.  Other possibilities include higher prices for men and fewer establishments generally because of the risk of punishment.

In Canada, a politician is trying to eliminate injustice, mandating equal prices for men and women for haircuts, drycleaning and so on.  Fortunately, he has a very perceptive wife or he might have missed the opportunity:

An Ontario politician is trying to change what he feels are unfairly high prices paid by women for hairdressing, dry cleaning and clothing.

Lorenzo Berardinetti, a backbench MPP for the governing Liberal party, has introduced a private members' bill in the Ontario legislature that, if passed, would mean men and women would pay more similar prices for these types of goods and services.

He said he feels the current situation, which means women often pay far higher prices for things like hair cuts, is unfair.

”My wife brought it to my attention, and we noticed it when we went to the dry cleaners and ... when we went out to buy some clothing it made a big difference as well.”

Incidentally, my no-frills unisex barbershop charges me $10 for a haircut that takes about ten minutes.  Women pay $18 and up depending on what they want.  Their cuts take 25-30 minutes.  I asked my haircutter if she thought women should pay the same prices as men.  Sure, she said.  If a woman wants a man's haircut, I'll give her one and charge $10.

This is an interesting option for Ms. Berardinetti.  She could start wearing men's clothes and ask for a man's haircut.  Her drycleaning bill would fall, too.

Mr. Berardinetti said he's looked at other jurisdictions, such as in California, which has already enacted a similar law in 1996. Another state, Massachusetts, has the Public Accommodations Act, which ensures fair gender-based pricing for hair and other cosmetology services.

Anyone out there seen any studies of the impact of these progressive measures?

I Still Disagree with Warren Buffett

Confusion over the so-called ‘trade deficit’ is ever-lasting. See, for example, David Ignatius in today’s Washington Post, and also this editorial in today’s USA Today.

Ignatius’s fear is stoked by Warren Buffett’s latest letter to his Berkshire Hathaway shareholders – a letter that I blogged on recently.

A handful of people have since e-mailed me with accusations that I don’t understand Mr. Buffett. Perhaps this is so. (I’ve been wrong too many times for me ever to stop entertaining the possibility that my suppositions and ideas might be riddled with flaws.)

But having re-read the part of Buffett’s letter dealing with the trade deficit (more accurately, the current-account deficit), I still believe that I’m right and he’s wrong. If my paying my Virginia neighbor $10 to mow my lawn creates neither debt nor other economic problems, how would my paying a Canadian $10US to mow my lawn create debt or other economic problems? What conceivable economic difference can the latitude or longitude of the seller’s residence make?

One correspondent agreed that I’m correct for cash transactions (such as in the example in my earlier post). But this correspondent noted correctly that many transactions are done on credit. In such transactions the increase in the U.S. current-account deficit might indeed also increase the indebtedness of U.S. citizens.  But even then there’s nothing necessarily to worry about.

Suppose my neighbor in Virginia accepts the following offer that I put to him: "Ed, if you mow my lawn today, I’ll pay you $10 on January 1, 2006." Ed agrees and mows my lawn today.  And for the rest of 2005 I’m indebted to him to the tune of $10.

This indebtedness might or might not be good for me. Was it a foolish transaction? Maybe; maybe not. No one apart from me and my wife can judge whether or not the costs of my incurring this debt to Ed exceed or fall short of the benefits we receive from having our lawn mowed today in exchange for becoming indebted to our neighbor. (Ditto for Ed.)

Either way, Warren Buffett presumably doesn’t wring his hands worryingly over this debt. He’s surely intelligent enough to realize that there’s nothing inherently wrong with this debt or with the transaction that created it.

But now suppose that I’m an American living just on the U.S. side of the U.S.-Canada border. My next-door neighbor Ed is a Canadian living just on the Canadian side of the U.S.-Canada border. Ed mows my lawn today in exchange for my promise to pay him on January 1, 2006 ten U.S. dollars.

In this case, not only does the U.S. current-account deficit for 2005 rise by $10, so, too, does Americans’ indebtedness to foreigners rise by $10 because of this neighborly transaction.

But is there even a whiff of relevant economic difference between this transaction when it takes place between two Americans and this transaction when it takes place between an American and a Canadian?

Perhaps there is a difference – a difference seen by Warren Buffett, David Ignatius, Paul Craig Roberts, Pat Buchanan, Lou Dobbs, and others, but missed by me. Please – and I’m not being facetious – if you detect an economically relevant difference between these two transactions, write to me and enlighten me.

But until I’m shown such a difference, or discover the difference on my own, I cannot but conclude that Buffett’s concerns about the trade deficit are misplaced.

Veritas

I’ve read several reports – for example, here – of the discomfort suffered by several Harvard students because sophomore Michael Kopko is selling maid service to Harvard dorm residents.

These reports mostly all quote Harvard’s newspaper, The Harvard Crimson, as opining

By creating yet another differential between the haves and have-nots on campus, Dormaid threatens our student unity.... We urge the student body to boycott Dormaid [the name of Kopko’s company].

But my favorite quotation from the Crimson opinion is this:

The egalitarian nature of dorm life helps to foster a sense of collegiate camaraderie, an unadulterated respect for peers; it generates a level playing field that encourages learning between people of all upbringings. A service like Dormaid can bring many levels of awkwardness into this picture. For example, do two people sharing a double split the cost? What if one wants the service and the other does not? What if one cannot afford it? Hiring someone to clean dorm rooms is a convenience, but it is also an obvious display of wealth that would establish a perceived, if unspoken, barrier between students of different economic means.

Here's the whole Crimson opinion.

This episode is too typical. An enterprising soul perceives a need and creatively offers a product or service -- at his own financial risk -- to satisfy that need. Everything is voluntary. No one is forced to buy the service; no one is forced to work for it. But well-read ignoramuses, infatuated with their own imaginary higher capacity for caring for others, viscerally react against commercial exchange. In this case, those opposed to Dormaid worry that because some but not all students will find it worthwhile to buy maid service, "inequality" among the Harvard student body will increase.

Is the typical Harvard student so immature that he suffers envy when some of his fellow students buy maid service that he chooses not to buy? (Bonus question for economics students: Why did I say "that he chooses not to buy?" rather than "that he can’t afford?")  Is he so sensitive, so very, very tender, that he loses emotional stability at the sight of a friend’s dorm room freshly cleaned by maids?  Is he so intellectually and socially inept that he can't work out an amicable arrangement with his roommate if one wants to use Dormaid and the other prefers not to do so?

I have a suggestion for those who worry that Dormaid will create a larger "differential between the haves and have-nots on campus" – rather than bitch and moan, start your own maid service. And offer it free of charge, so that your concern for Harvard’s have-nots will be expressed in a way much more meaningful than mere words.  Otherwise, go back to your Plato or Habermas and let Mr. Kopko go about his business in peace.

(Unrelated question: how many "have-not" students are enrolled in Harvard? Just curious.)

Waxing and Waning

The Washington Post reports today that there is growing skepticism about Bush's social security plan.  In yesterday's web edition of the Post, the support was waning.  Either way, it looks like bad news for privatization.  Only 35% of poll respondents approve of how Bush is handling social security.  But look at these numbers from the detailed report on the poll numbers:

9. I'm going to mention changes some leaders have proposed for Social Security. Please tell me if you support or oppose each one.

 

                                                Support     Oppose     No opin. 
a. Increasing the Social Security tax rate       32          64          4

b. Collecting Social Security taxes on all the
   money a worker earns, rather than taxing only 
   up to the first $90,000 of annual income      56          40          4

c. Raising the retirement age to receive full 
   Social Security benefits to 68, instead of 
   the current 67                                33          66          2

d. Further reducing the benefits paid to people 
   who retire early. For instance, people who 
   retire at age 62 would get 63% of their full 
   benefits, rather than the current 70%         36          62          2

e. (HALF SAMPLE) Changing the way Social Security 
   benefits are calculated so that benefits increase 
   at a slower rate than they would under the 
   current formula                               37          57          6

f. (HALF SAMPLE) Reducing guaranteed benefits for 
   future retirees                               20          75          5

So respondents don't approve of Bush's handling of the issue, but other than raising taxes on people who earn more than $90,000 a year, virtually every other solution to social security's problems are as unpopular as what Bush has offered.  But here's the real eye-opening result:

9g. Would you support or oppose a plan in which people who chose to could invest some of their Social Security contributions in the stock market?

                Support     Oppose     No opin.   
3/13/05           56          41          3
12/19/04          53          44          3
7/15/02           52          45          3
4/22/01           53          46          2
3/25/01           52          45          3
10/30/00 LV       58          35          8        
9/6/00   RV       59          37          4        
5/10/00           64          31          5 

Way down in the article, maybe a quarter of a way from the end, the story eventually mentions that some respondents do support private accounts but doesn't report the overall level of support.  Instead, there's an analysis of the differences in support by age:

In this month's poll, 68 percent of adults 18 to 29 years old said they support investing some Social Security contributions in the stock market. That support falls with the respondents' age, to 60 percent among those 40 to 49, 53 percent among those 50 to 64, and 37 percent among those 65 and older.

So among people 50 and younger, 60% or more support private accounts.  The only people who oppose private accounts are the elderly.  That would have made an interesting headline:

Bush Does Poor Job Marketing Private Accounts

Whether it's marketing or reporting, or the plan is too complicated or phased in too slowly, the numbers suggest that there may be hope for private plans, despite the Post's pessimism.

Waning Support for Bush Proposal

Bush's social security proposal is in trouble.  According to a story in the Washington Post:

Support for Bush on Social Security Wanes

Barely One-Third of Americans Approve of President's Plan, Poll Finds

The Post promises more detail from the poll after 5 p.m. I'd like to see what question was asked to generate the headline.  I'll bet they didn't ask this question:

"President Bush has proposed allowing workers to devote part of their payroll tax to fund private retirement accounts.  Would you prefer this plan or one that reduces social security benefits by 22%?"

I suspect that would have boosted the numbers supporting the Bush plan a bit.  It's easy to dislike the Bush plan in the abstract.  But reality isn't optional.  We are either going to have to raise tax rates, lower benefits or fiddle with the other rules of the system.  That 22% number is from the latest CBO study.

I like the word "wanes" in the headline.  It makes it sound like the whole idea of private accounts is just about done.  An alternative would have been "Twilight of an Idea: Bush Plan Headed for Dustbin."

When the dust clears, it will be fun to look back on the media coverage.  My favorite was the New York Times article ($ required) that looked at the world before social security as if Bush were planning to eliminate it.  The headline:

Life Before Social Security; 'A Great Calamity Has Come Upon Us'

If you didn't know better, the media coverage would lead you to think that private investing was against the law in the United States.  It's so risky after all and requires so much time and knowledge.  Somehow, over half of us manage to invest and still sleep somewhat peacefully at night.

Roid Rage

Alas, Representatives Davis and Waxman did not read my earlier post and they are actually going ahead with hearings.  Does Congress have the right to use subpoena power to force employees from professional baseball teams to testify under oath about their drug habits?  Of course they do, as the New York Times reports:

The panel's Republican chairman, Representative Tom Davis of Virginia, also suggested that a failure by team owners to cooperate in the investigation by the House Government Reform Committee could threaten the sport's 83-year-old antitrust exemption, as well as a variety of federal tax breaks.

"They not only enjoy antitrust exemptions, they also enjoy a lot of tax exemptions," Davis said on NBC's "Meet the Press," adding that the committee would be ready to issue contempt citations against the subpoenaed players if they failed to show up for the hearing on Thursday, which could result in jail terms.

Invoking the antitrust exemption is a two-fer.  First, it's a threat.  Second, it's a justification.  You doubt the right of Congress to force these players to testify?  But what about the antitrust exemption?  Congress helped establish baseball as we know it via the antitrust exemption.  That gives them the right to hold hearings.  I hear this argument from friends and talk-show hosts.

By this logic, the fact that the street in front of my house is paved using public funds gives government the right to look into my bank account, chat with my daughter about my parenting skills and use my house as a temporary office.  After all, the government has contributed to my prosperity.  That entitles them to...to...to what? 

I understand the argument, but it's a lousy argument.  It's the same argument that says that because government gives pharmaceutical companies patent protection or because taxpayers funded fundamental drug research that pharmaceutical companies use, government then has the right to tell those companies what to charge.  I see the logic.  You can certainly make an argument that pharmaceutical companies "owe" taxpayers something for contributing to their profits.  But the real questions is whether draining the profits from pharmaceutical companies via price controls makes taxpayers better off.  The real question is whether it is good for baseball or good for its fans or good for our rights as private citizens in the face of a powerful state for Congress to hold these hearings.

And don't forget, by the same logic that baseball's antitrust exemption gives Congress the right to fiddle with baseball, your dog owns your house. 

Easterly on Sachs

Jeffrey Sachs wants to save the world.  He basically wants to mobilize the West to save the rest of the world from poverty.  It's a nice idea. If I thought it would work, it would be a crusade worth joining.  William Easterly explains why it won't in a review of Sachs's new book in today's Washington Post.  Read Easterly's book, The Elusive Quest for Growth, instead.

Bravo! for the Armchair Economist

In this new column in Forbes, the inimitable Steve Landsburg exposes part of the morally repugnant nub of protectionism:

I hold this truth to be self-evident: It is just plain ugly to care more about total strangers in Detroit than about total strangers in Juarez. Of course we care most about the people closest to us-our families more than our friends and our friends more than our acquaintances. But once you start talking about total strangers, they all ought to be on pretty much the same footing. You could say you care more about white strangers than black strangers because you've got more in common with whites. Does that make it okay to punish firms for hiring blacks?....

Stealing assets is wrong, and so is stealing the right to earn a living, no matter where the victim was born.

I add only that the other part of this morally repugnant nub is government forcibly restricting domestic citizens’ freedom to spend their incomes as they see fit. (Salt is injected into this wound by the frequent sermons protectionists offer to justify their thuggery.)

I thank Brian Summers for alerting me to Landsburg's column.

Put a Lid on that Criticism of Markets

My family and I just returned from spending the morning at the new Wegmans supermarket that opened last month in Fairfax.

What a place!! Wegmans is like no other supermarket I’ve been to, and – loving to shop, loving even to shop for groceries – I’ve been to many. I’ll blog again soon on this remarkable cathedral to creative capitalism and the much-too-much derided consumer culture.

But here I want just to celebrate a new drop of prosperity in the prosperity pool: Solo’s Traveler Plus plastic lids for coffee cups.  Karol and I ran across this convenient item when we bought cups of coffee to drink in Wegmans' cafe.

Here’s a description of the lid that I found at bookofjoe (at which you'll also find a picture of this clever little device):

The device consists of two interlocked pieces of lightweight plastic.

The lid is securely reclosable because of its unique swiveling design that easily lets you shut the opening completely, over and over and over without weakening the feature since there's no hinge to break.

Bonus: the opening takes a straw perfectly, and then swivels just enough to close the opening perfectly around the circular straw profile.

As Karol kept repeating as we wended our way through Wegmans, "Who can not love the market?!"

Zapp's Potato Chips

In the first 1992 presidential debate, then-candidate Ross Perot famously quipped "you make more making computer chips than potato chips." This clever little phrase was part of Perot’s explanation for why America needed a high-tech-focused industrial policy (my term) to handle the demise of the cold-war defense industries.

I typically respond with two observations to people who insist on the intrinsic merits of computer chips over potato chips.

First, I’d rather eat potato chips than eat computer chips – but I admit that potato chips don’t work as effectively in my laptop computer.  Second, Herman Lay – founder of Frito-Lay’s – made a fortune producing potato chips.

Here’s another chip entrepreneur whose story is interesting: Ron Zappe.

Zappe founded Zapp’s Potato Chip Co. in 1985. It was successful from the start, today employing 100 people at its plant in Gramercy, Louisiana (which is about half-way between New Orleans and Baton Rouge) and producing 150,000 bags of chips per day. Zapp’s chips are now the number two selling snack food in Texas and Louisana.

I’m pretty sure that Mr. Zappe is a wealthy man.

He once worked for Ingersoll-Rand and then started a few companies selling oil-field equipment. That industry went south in the mid-1980s when oil prices plummeted. His companies followed suit.

What’s a guy in his early 40s to do?

Ron Zappe used his creativity and energy to start a company producing Cajun-spice potato chips – gourmet chips, even, as some (including moi) insist.

Zappe built his Gramercy, LA, plant in 1985 in a building recently vacated by an automobile dealership. Gramercy was then filled with laid-off oil and gas workers.

This is one, relatively modest example of the market’s vibrancy. Had huge subsidies poured in from Washington to keep south Louisiana’s oil-and-gas firms artificially profitable, Ron Zappe might today still be peddling the pumps he peddled before moving into chips. Would he have been better off? Maybe, but probably not.

But I for one would have been worse off. Being a New Orleans native, I discovered Zapp’s chips just after they first hit the market. I love them. I absolutely adore them. They’re spectacular. Were it not for the fall in the prices of oil and gas, and the consequent release of resources (including Mr. Zappe) from the energy industry, I and other fans of Zapp’s chips would be all the poorer.

I thank my long-time friend Kerry Dugas for alerting me to Ron Zappe's story.

Don't Bet on Buffett's Economics

In his 2005 annual letter to his Berkshire Hathaway shareholders, Warren Buffett offers his thoughts on the trade deficit.

He's a far better investor than he is economist.

Like so many others, Buffett confuses a trade deficit with debt.  But as I've explained before, no way, no how is a trade deficit indentical with debt.  (See here, here, here, here, here, here, here, here, and here.)

But let me address a misunderstanding that I believe I haven't yet addressed at Cafe Hayek.

.....

Buffett no doubt believes that dollars held by foreigners represent debt owed by Americans to foreigners.  Only in the most irrelevant and formal sense is this belief valid.  Each U.S. dollar is a Federal Reserve Note, issued by a U.S. government institution (the Fed) and formally redeemable by that U.S. institution.  But redeemable for what?  Answer: another Federal Reserve Note of the same value.

In fact, dollars held by foreigners are not debt in any economically relevant sense.

"But can't foreigners spend these dollars on U.S. goods, services, or assets?!" I hear someone (Buffet, perhaps) asking.  Of course dollars can be spent in this way; that's the only reason foreigners accept dollars in exchange for the things they sell.  But this fact doesn't make dollars debt.

Suppose my next-door neighbor in Virginia agrees to mow my lawn for $10.  He mows my lawn and I immediately give him a $10 bill.  No debt is created.  I owe my neigbor nothing; my neighbor owes me nothing.  My neighbor can now spend this $10 bill on whatever he chooses.  I no longer have this $10 to spend.

Does anyone worry that my neighbor has an additional $10 bill in his wallet that he might whip out at any time to buy something priced in dollars?  This $10 can indeed be used as a claim on ten-dollars worth of U.S. output or assets.  But it ain't debt.  No one owes my neighbor anything as a consequence of his ownership of that $10 bill.

Change the example only slightly.  Suppose I live, not in Virginia, but in Maine just barely on the U.S. side of the Canada-U.S. border.  My next-door neighbor is a Canadian citizen living in Canada.  He mows my lawn; I pay him ten U.S. dollars.  As long as my neighbor holds that $10 bill, the U.S. current-account deficit is higher by $10.  (I outsourced my mowing to Canada -- importing $10 worth of services from abroad.)

Is there any reason for George Bush, Alan Greenspan, Britney Spears, Don Boudreaux, Warren Buffett, Jimmy Buffett, or any one else to worry about my Canadian neigbhor holding this $10?  Is the situation any different, economically, when my neighbor (and trading partner) happens to be Canadian than when he's a Virginian?  Of course not.

But the Oracle of Omaha does worry.  He shouldn't.  And nor should anyone else.

Thanks to Andy Roth of the Club for Growth (and also a student at GMU Economics) for alerting me to Buffett's annual letter.

Kidding about Steroids

Congressional Representatives from the Government Reform Committee announced today that they were just kidding about holding hearings on the use of steroids in Major League Baseball. 

"The whole thing was obviously a joke," admitted Representative Davis the Chair of the committee.  "We didn't invite Barry Bonds, did we?  We were just kidding.  After all, how could hearings accomplish anything other than give us a lot of face time on national TV and the nightly news?"

Ranking Minority Member Waxman agreed.  "We were never serious about accomplishing anything positive for baseball or children.  We just wanted to start a national dialogue.  We've done that.  Now we're going to get back to our central purpose—the business of running the lives of everyday people."

Some have speculated that Congress is simply reacting to the backlash generated by their call for hearings.  After complaints of McCarthyism, the Committee members may have decided that they had misread the benefits of grandstanding and appearing self-righteous in front of some of America's most popular athletes.

With the hearings cancelled, Major League Baseball has offered the politicians on the committee an alternative means of enhancing their image as courageous warriors for baseball and the children of America.

Representatives from the Government Reform Committee would come to Florida for a nationally televised event.  Democrats would bat left-handed against Randy Johnson and Republicans would bat right-handed against Roger Clemens.  Batters would not be allowed to wear a helmet.  Specially designed ski-boots anchored to the batter's box would help the politicians from bailing out.  Ticket sales and advertising revenues would be used to fund a Public Service Announcement on the virtues of playing Little League and the benefits from wearing a helmet while batting.

The major networks and the cable news channels have all agreed to carry the event live.  Calls to the offices of Representatives Davis and Waxman were not returned.

Other People's Money

I recall seeing a clip -- perhaps five or six years ago -- of then-Secretary of Housing and Urban Development Andrew Cuomo passionately inviting his audience to let him give them more money for better housing.

If Sec’y. Cuomo were offering his own money for such purposes, I would have praised him and admired him.  But of course, despite his words – which were something like “I want to give you more money for housing!” – the money he was offering wasn’t his own.  He was offering money taken forcibly from taxpayers.

Why so many people find such sentiments to be ethically inspiring is beyond me.  What’s so damned generous or difficult about spending other people’s money?

I recalled Mr. Cuomo’s disgustingly self-indulgent display of his imagined munificence when I read this letter in today’s Wall Street Journal by my buddy Andy Morriss.

Sen. Lamar Alexander is quoted in "Senators Warm Up to Emissions Curbs" (Politics & Policy, Feb. 22) as saying he's "willing to invest a lot of money [to cut carbon dioxide emissions] if it makes sense to do it." Bully for him, so long as he's investing his money and not mine. When politicians talk about "investing," it usually means spending someone else's money, which is exactly what Sen. Alexander intends to do with his support for subsidies for companies that buy carbon-dioxide reduction equipment.

Andrew Morriss

Congress on Steroids

There appears to be some concern about whether some baseball players have been ingesting a performance enhancing sustance called steroids.  A recent book (no link, thank you very much) by a former major leaguer has alleged such use.  Some players have admitted mistakes.  And some are ready to move on.

Time for Congress to save the children and baseball.  Nothing about apple pie or motherhood in Representative Davis's press release:

Today Chairman Tom Davis (R-VA) and Ranking Minority Member Henry A. Waxman (D-CA) announced a hearing on Major League Baseball's recently negotiated steroids policy. The hearing will focus on how the testing policy will be implemented, and how it will effectively address the use of prohibited steroids by players.

Maybe they'll tackle apple pie and motherhood on Friday.

"Some have asked why a congressional hearing is a good idea, why it's necessary," said Rep. Davis. "First, there's a cloud over baseball, and perhaps a public discussion of the issues, with witnesses testifying under oath, can provide a glimpse of sunlight. Second, I'm extremely concerned about the message being sent to children. We have a responsibility to help educate all Americans but especially young people who admire and emulate their heroes--about the very real health risks associated with steroid use. We can help kids understand that steroids aren't cool.

Ah, it's always about the children.  Though it's hard to understand why a Congressional hearing will reduce the coolness of steroid use.  Especially when many of the players they'll be hearing from are future Hall of Famers.

I particularly like the name of the committee.  It's the Government Reform Committee.  Maybe they could hold hearings on why the Government Reform Committee is holding hearings on steroids.  The press release could read something like this:

Today Chairman Tom Davis (R-VA) and Ranking Minority Member Henry A. Waxman (D-CA) announced a hearing on why the House Government Reform Committee is wasting its time prying into stuff that is none of the business of Congress.  The hearing will focus on how the hearing policycame to be implemented, and how it will effectively address the use of absurd hearings by publicity hungry representatives.
 
"Some have asked why a congressional hearing is a good idea, why it's necessary," said Rep. Davis. "First, there's a cloud over Congress and perhaps a public discussion of the issues, with witnesses testifying under oath, can provide a glimpse of sunlight. Second, I'm extremely concerned about the message being sent to children. We have a responsibility to help educate all Americans but especially young people who admire and emulate their heroes--about the very real risks associated with the abuse of Congressional power. We can help kids understand that the Constitution is cool.

My earlier take on steroids is here.

Price Control Fallacy

Steve Chapman, in the Chicago Tribune, does a nice job explaining why a legislated minimum wage harms its alleged beneficiaries.

At their best, price controls such as minimum-wage legislation and prohibitions on so-called ‘price gouging’ are examples of what Matt Ridley calls “the reverse naturalistic fallacy.”  This fallacy is committed whenever someone goes from an “ought” to an “is” – that is, it is committed whenever someone jumps to the conclusion that because something ought to be true, that that something is true.

Minimum-wage legislation, for example, is based on the premise that, because no worker’s services ought to be worth less on the market than whatever hourly wage is specified by the legislature as the ‘minimum wage,’ no worker’s services are in fact worth less than this amount.  So, declare a minimum wage and – voila! – employers will suddenly find that each of their workers produces at least as much value per hour as the minimum wage.

Likewise with price ceilings.  It ought not to be the case that the market value of staple goods such as gasoline, bottled water, and lumber rise so sharply in the immediate aftermath of a natural disaster.  The price hikes that reflect this reality are indeed unpleasant, and the undelying reality that they reflect is truly regrettable and difficult.  It ought not be! Prohibiting price hikes is an attempt to force what is to be what ought.

Legislated price floors and ceilings are no less childish and futile than the acts of children who close their eyes tightly and snuggle deeply into their blankets on Christmas Eve night sincerely convinced that if only they believe hard enough, if only they get to sleep soon enough, if only they want it badly enough, Santa Claus will really visit that night bearing wonderful toys.

Children, of course, grow out of their belief in Santa Claus.

(Thanks to Craig Newmark for the pointer to Chapman's article.)

Noitaluger (that's 'regulation' spelled backwards)

The Ohio state government will soon require all auctioneers operating in that great state to be licensed.  This licensing requirement goes into effect on May 2.  Here’s the whole story; just below is a relevant excerpt from it:

Besides costing $200 and posting a $50,000 bond, the license requires a one-year apprenticeship to a licensed auctioneer, acting as a bid-caller in 12 auctions, attending an approved auction school, passing a written and oral exam. Failure to get a license could result in the seller being fined up to $1,000 and jailed for a maximum of 90 days.

This licensing requirement is stirring up controversy because, as written, it will prevent ordinary Ohioans from using eBay.  Supporters of the regulation deny that its intended reach is so vast.

Here’s the response offered by state Senator Larry Mumper, author of the legislation: "It certainly will not apply to the casual seller on eBay, but might apply to anyone who sells a lot," he said.  "If someone buys and sells on eBay on a regular basis as a type of business, then there is a need for regulation."

Sen. Mumper’s statement is striking for its backward logic.  It is precisely the regular seller – the person who earns his living buying and selling on eBay – who is least likely to cheat in his dealings on eBay.  Regular sellers have much more invested in their good reputations to risk it all by cheating their trading partners.  If government regulation is needed on eBay, it should apply first and foremost to the occasional user, for the occasional user is less likely than a regular user to be held in check by concern for his good commercial reputation.

For a variety of reasons, I don’t believe that government regulation is needed for eBay (or even for real-space auctioneers).  But it’s interesting that, politics being what it is, the stated justification for this regulation and for exceptions to it have precious little sound economic backing.

Thanks to Jon Sweet for alerting me to Ohio's latest effort to protect and to serve.

Are Europeans Really as Lazy as They Boast of Being?

The Economics Focus column in this-week’s Economist (paid subscription required) is especially good.  It deals with the question: Are Europeans lazier than Americans?  (The wording is my own.)  The Economist's answer to this question is 'probably not.'

(Note: Europeans boast about being lazier than Americans.  But by describing their alleged laziness as being “a higher preference for leisure” – or some such phrase – Europeans, and Europhiles, make their laziness sound positively glamorous.)

But The Economist sensibly doubts that Europeans really are significantly lazier than Americans.  Yes, yes there are raw data that are consistent with the proposition that Europeans are lazier.  The labor-force-participation rate in the E.U. is much lower than it is in the U.S.  Europeans also retire earlier, on average, than do Americans.  And Europeans take more vacation time than Americans.  These data are consistent with the thesis that Europeans are lazier than Americans.

But consider these facts reported by The Economist:

Only one in ten EU couples with small children said that they prefer to rely on a male breadwinner for their income, yet four in ten lived that way.  One explanation is that the incomes of second earners, who are usually women, are taxed at a much higher rate than the main earner.  In Germany, spouses of people on the average production worker’s wage must pay 53 cents in tax out of the first euro they earn.

And on the issue of retirement….

The OECD has attempted to measure the implicit “tax” on working for someone nearing retirement age.  This tax measures the pension and other benefits that old people forgo when they continue to work, expressed as a proportion of their wage.  A common problem is that the pension benefits cannot be deferred in their entirety in many countries.  If you keep working, some benefits are lost altogether and cannot be collected later.

For 55-year-olds in Germany and France, this implicit tax amounts to 50% of the average wage for people in that group.  For 60-year-old Dutch people, the loss of benefits is 90% of the wage; Belgians face an effective tax rate of 80%.  Faced with such arithmetic, why should older people bother to work?

You call it: Are Europeans lazy (as they boast of being) or taxed and subsidized obnoxiously?

What keeps wages high?

What keeps wages higher than a subsistence level?  I suspect most people think it's a combination of labor unions and the minimum wage.  Yet over 85% of us in the private secter earn more (some of us much more) than the minimum wage and are not in a union.  So what's the trick?

The economist's answer is competition.  Any one employer would like to exploit me, perhaps, but that employer's ability to do so is eliminated by the fact that I have alternatives—other employers who find my skills attractive. This remarkable phenomenon goes by the name of competition, though as I suggested in my Llosa post, using that word may lead to misunderstanding.

A recent Washington Post article points out the power of alternatives.  (Over at Marginal Revolution, they would call this "Markets in Everything."  Lobbyists pay people to wait in line in order to get choice seats at Congressional hearings:

The line-standers are out all night on Capitol Hill, looking homeless. "But we're not homeless," one of them says; just trying to keep warm in ski caps and puffy coats.

Waiting 10, 20, 30 hours outside the House or the Senate, holding a place in line so some well-pressed lobbyist can sit upfront at a congressional hearing and bat eyes at all the right people -- this is democracy, or something like it. More importantly, it's a job.

The people who do it appear to be powerless.  They appear to be without skill:

"There's no expertise and there's no commodity," says Jay Moglia, a line-stander. He works dayside as a bike courier, as a lot of them do, and he takes pride in that work, which calls for strength, training, bravado.

Not line-standing. In this job, there's only the ability to stand up. There is no such thing as a natural. No mother ever senses her child's innate talent for line-standing.

The line-stander never sees his product. He fries no nuggets and rakes no yards; no shorn hairs fall on the toe of his shoe while someone breathes into the mirror, Beautiful. The world is the same when his job is done, only the sky is lighter and some suit is making the money that some other suit was making last week.

The line-stander is a two-foot-square space on a sidewalk, a cipher, a proxy, a powerless stand-in for a figure of great power.

Surely, these folks must make the minimum wage.  Surely, without the minimum wage, they would be exploited ruthlessly by greedy lobbying firms.  And yet:

A line-standing company may pay a worker $10 an hour, $15 if he's a manager. He's holding a spot for a lobbyist or lawyer or legislative assistant whose sleep is much more valuable, who wants the luxury of showing up half an hour before the hearing. Some of the clients just want into the hearing room; others are very particular about getting good seats. The closer they are to the action, the more important they feel. They're players, or want to be.

Ah, the power of alternatives.

 

Retail Stories

What’s the best case that can be made that Wal-Mart destroys downtown – destroys Main Street – in ways that no one really likes?

The fact that people work and shop at Wal-Mart voluntarily makes this case a difficult one to argue. (I put aside here any abuses by Wal-Mart of eminent-domain or government regulatory powers. Such abuses are not central to the standard case repeated ad nauseam against Wal-Mart.) After all, if each consumer – having the choice between mom’n’pop stores on Main Street and Wal-Mart – chooses to shop at Wal-Mart, isn’t the demise of Main Street retailers the result of voluntary consumer choice and, hence, sufficient-enough evidence that consumers prefer Wal-Mart to Main Street mom’n’pops?

It’s a tempting conclusion – and probably a correct one. Nevertheless, this conclusion isn’t as unavoidable as it at first appears. Writing recently in the New York Times, Robert Reich explains why Wal-Mart’s success isn’t proof of Wal-Mart’s desirability. Here’s Reich:

The problem is, the choices we make in the market don't fully reflect our values as workers or as citizens. I didn't want our community bookstore in Cambridge, Mass., to close (as it did last fall) yet I still bought lots of books from Amazon.com. In addition, we may not see the larger bargain when our own job or community isn't directly at stake. I don't like what's happening to airline workers, but I still try for the cheapest fare I can get.

In other words, because our individual choices result in unintended consequences, we cannot conclude that these unintended consequences are ipso facto desirable. Being 'the results of human action but not of human design,' they are themselves, of course, unchosen.

Think of the prisoners’ dilemma. In that case, making the choice that is individually optimal produces an outcome that is undesirable – an outcome that, although produced by individuals’ voluntary and rational choices, would never itself be chosen by the individuals who made those choices.

So, too, with free-riding and public goods – which is what I think Reich hints at in his op-ed. It might be that every consumer in town prefers maintaining Main Street as it is even if doing so means paying higher prices for retail items. But no one person’s actions – either to continue patronizing higher-priced mom’n’pops or to take advantage of Wal-Mart’s lower prices – will have a significant effect in determining if Wal-Mart succeeds and Main Street is changed forever. So each person tries to free-ride off of the efforts of other consumers; each person shops at Wal-Mart hoping that enough other consumers will continue shopping on Main Street. Because every consumer reasons and acts this way, an undesirable outcome (the demise of Main Street mom’n’pops and the success of Wal-Mart) results from each of these same consumers’ individually rational, voluntary choices.

This possibility cannot be denied as a matter of logic.

But it can and should be dismissed as a basis for making policy. The reason is that it’s practically untestable, unverifiable. Note how easily this same argument can be made to reach the opposite conclusion about Wal-Mart and Main Street.

Suppose that Wal-Mart today is the only retailer in town, situated (as it typically is) on a large plot of land a few miles from downtown. Tomorrow, smaller rivals open up on Main Street. Further suppose that each consumer truly wants the Wal-Mart to remain open. (Perhaps consumers have become familiar and grown comfortable with Wal-Mart.) But although each consumer truly prefers that Wal-Mart survive, each consumer also chooses to patronize the more conveniently located downtown retailers. That is, each consumer tries to free-ride on what he hopes will be other consumers’ continued shopping at Wal-Mart. But with each consumer acting in this way – with almost all of them opting to enjoy the greater personal convenience of patronizing the close-in Main Street retailers rather than suffering the inconvenience of driving out to the Wal-Mart – the Main Street retailers prosper and the beloved Wal-Mart shuts down.

....

The fact is, it’s child’s play to tell such tales. Unless an outcomes is consciously chosen, it will always be possible to spin stories about how that unintended outcome is undesirable even to those people whose voluntary choices brought it about.

Of course, the sentiment of many people (including, I suspect, Robert Reich) is precisely to have outcomes chosen consciously – which means, chosen through the political process. But for a variety of reasons spelled out by public-choice scholars, choices made within political settings are far more likely than choices made in private-property-rights settings to result in outcomes that are generally undesirable.

Work by my brilliant young colleague Bryan Caplan is especially relevant here.

Does He REALLY Believe This?

Happily, yesterday’s mail brought the hot-off-the-press issue of Reason magazine.

I’m eager to read the debate between Tyler Cowen and James Glassman on Social Security reform. (I’d provide a link here, but I'm unable now to find one.)

What struck me most forcefully in this issue of Reason, however, is this reported quotation from Robert Bork. Bork so hates modern American pop culture that he’s ambivalent about the fall of the Berlin Wall. The reason is that its destruction permitted blue jeans, rock music, and the rest of the panoply of American decadence to spill eastward into countries once protected from this scourge. Opines Bork: "You almost began to want to put the wall back up."

Even allowing for rhetorical overstatement, what kind of person would harbor such a sentiment? I emphatically do not share in Bork’s assessment of modern American pop culture as uniformly degenerate and debauched, but even if I did agree with Bork on this matter, I can’t imagine being anything but overjoyed at the fact that the Iron Curtain is in shreds.

What kind of person entertains the possibility that access to Sunday shopping, rap music, sit-coms, and even pornography might be worse than institutionalized murder, torture, mind-control, and impoverishment?

....

The Democrats’ single greatest contribution to America during the 1980s was to keep Bork off of the U.S. Supreme Court.

The Law of Supply in Action

Teaching the law of demand to principles-of-economics students is a bit easier than teaching the law of supply. The reason is that everyone understands that consumers want to buy greater quantities of a good as its price falls – and fewer quantities of that good as its price rises.

Teaching the law of supply is a tad bit trickier because of the widespread knowledge of economies of scale. Each semester, several thoughtful students always ask "Doesn’t producing more of something reduce the cost per unit and, hence, enable producers to sell it at a lower price? So don’t lower prices, rather than higher prices, correspond to higher quantities supplied? I don’t understand why price must rise in order to inspire a firm to offer greater quantities for sale." Good point.

I respond first by asking the students to wait a few lectures until we explore the law of diminishing returns; they’ll see then that no firm can expand output indefinitely without eventually seeing its costs of production per-unit rise.

Second, I advise that they now not think of the decisions of an individual firm but, rather, of the decisions of many firms. I ask them: What will a rise in prices do to the number of suppliers in the market? Will it increase the number of suppliers? Lower this number? Leave it the same?" The correct answer, of course, is "increase the number of suppliers."

When I next teach the law of supply to principles students, I’ll use this example that I found in today’s New York Times, which explains that

Oil drilling has long been a more common sight on the arid plains of West Texas, but oil prices topping $50 a barrel are now luring wildcatters to urban areas written off until recently as uneconomical by the energy industry.

Fake Economists (and real ones)

I often wonder why economists have such a bad reputation.  Much of it has to do with which economists people encounter on the news and in the newspapers.  These folks are typically forecasters of macroeconomic events, predicting interest rates, the daily twists and turns of the stock market and so on.  In so doing, they use few, if any, of the tools of economics.  Rather they are what might be called "economic engineers," people who use statistical models to try and explain events.  Worse, many of these people work for various companies or special interest groups and convey an image of economics as a tool of special interests.

Mario Vargas Llosa is a wonderful writer and a very good man.  He spoke last night on his identity as a liberal, a liberal in the European sense of the word, a fan of freedom and limited government.  Along the way, he criticized economists:

For example, there are liberals who believe that economics is the field through which all problems are resolved and that the free market is the panacea for everything from poverty to unemployment, marginalization and social exclusion. These liberals, true living algorithms, have sometimes generated more damage to the cause of freedom than did the Marxists, the first champions of the absurd thesis that the economy is the driving force of the history of nations and the basis of civilization. It simply is not true. Ideas and culture are what differentiate civilization from barbarism, not the economy. The economy by itself, without the support of ideas and culture, may produce optimal results on paper, but it does not give purpose to the: lives of people; it does not offer individuals reasons to resist adversity and stand united with compassion or allow them to live in an environment permeated in humanity.

Couldn't agree with him more.  He does go on to say:

It is culture, a body of shared ideas, beliefs and customs--among which religion may be included of course--that gives warmth and life to democracy and permits the market economy, with its competitive, cold mathematics of awarding success and punishing failure, to avoid degenerating into a Darwinian battle in which, as Isaiah Berlin put it, “liberty for wolves is death to the lambs.” The free market is the best mechanism in existence for producing riches and, if well complemented with other institutions and uses of democratic culture, launches the material progress of a nation to the spectacular heights with which we are familiar. But it is also a relentless instrument, which, without the spiritual and intellectual component that culture represents, can reduce life to a ferocious, selfish struggle in which only the fittest survive.

I think this is a misunderstanding of how the marketplace works.  It may be the result of our penchant as economists for using the word "competition."  I use it all the time.  I understand it to mean the propensity of humans to truck, barter and exchange.  But for too many, the word conveys the zero-sum game world of sports.  Maybe we should stop using it.

Ironically, Llosa later invokes an economist, Von Mises talking about the importance of culture:

A great liberal thinker, Ludwig von Mises, was always opposed to the existence of liberal parties because he felt that these political groups, by attempting to monopolize liberalism, ended up denaturalizing it, pigeonholing it, forcing it into the narrow molds of party power struggles. Instead, he believed that the liberal philosophy should be a general culture shared with all the political currents and movements co-existing in an open society supportive of democracy, a school of thought to nourish social Christians, radicals, social democrats, conservatives and democratic socialists alike.

And he closes with this lovely thought:

We dream, as novelists tend to do: a world stripped of fanatics, terrorists and dictators, a world of different cultures, races, creeds and traditions, co-existing in peace thanks to the culture of freedom, in which borders have become bridges that men and women can cross in pursuit of their goals with no other obstacle than their supreme free will.

Then it will not be necessary to talk about freedom because it will be the air that we breathe and because we will all truly be free. Ludwig von Mises’ ideal of a universal culture infused with respect for the law and human rights will have become a reality.

The Devout

Arnold Kling reports Richard Layard’s proposal that "the state should act to try to make family life more manageable, through better school hours, flexible hours at work, means-tested childcare, and maternity and paternity leave. Parenting classes should also be compulsory in the school curriculum and an automatic part of antenatal care." And, as usual, Arnold cuts directly to the core of the matter when he points out that

As far as I know, there is no evidence whatsoever that any of the solutions proposed--flexible work hours, compulsory parenting classes, etc.--have been shown to have an effect on the problem--divorce and broken homes. But I do not think this really matters to Layard. His happiness depends on imposing his policies on everyone else.

But let's give Layard as much benefit of the doubt as possible; let's try to imagine the best possible mind-set that he might experience to prompt him to offer such recommendations. He sincerely wants people’s lives to be improved.... he genuinely wants to help them.... he prays for happy outcomes.

Yes, he prays. He doesn’t think of his ruminations and demands for intercession as prayer, but I submit that that’s just what they are: prayers.

When, say, a Roman Catholic prays for the tsunami victims, he asks a higher power to relieve these victims of their suffering. He might pray, for example, "God, help them find new houses, feed them, and help them find lost loved ones." These are worthy sentiments and goals. And given the Catholic’s beliefs, he need not worry about how God will actually carry out answering these prayers. Being omnipotent and omniscient, God will make no mistakes in answering the prayers – no "Oh dear, I thought you asked me to ‘help them find new spouses’." Nor will God need any instructions or supervision on how best to actually carry out these tasks. The praying Catholic need never give a moment of thought to the specific means, the details, that God might use to solve the problems. All that the devout petitioner must do is to request the desired outcome, and he can then rest assured that God knows just the best means of achieving these outcomes.

And being benevolent, God will not abuse his power. Having the power and the go-ahead to override ordinary natural forces when helping the prayed-for tsunami victims, God will never, ever use this power for any goals other than those that genuinely help people.

For someone who believes in the Christian god, such prayers make sense. It would be pointless not to call upon this super-power for help – and it would be pointless to suffer anxiety over the possibility that God will abuse his power or use it negligently or recklessly or in ways that result in harmful unintended side-effects.

People like Layard, I dare say, have in their heads some image of government much like that of an all-powerful, all-benevolent deity. See a problem, turn government loose on it. Sure there are countless administrative details that must be chosen, implemented, and monitored when government tackles a problem, but we can trust the good motives, the democratic spirit, and administrative-law judges to somehow, sort of, well-enough typically kinda ensure that these dull but all-important details are dealt with wisely. And government being mostly good, we need not fear that it will abuse its power.

Of course, I don’t really know what Layard has in mind. I’m speculating. But my thesis fits the pattern of what I witness over and over again in American proponents of active government. Certainly, someone who does think of the state as a kind of at least semi-god would naturally find opposition to use of this state as evidence of inexplicable meanness or small-mindedness.

Legislating Morality

Just saw the movie K-Pax for the second time.  Kevin Spacey plays a guy who is either a lunatic or an alien from the planet K-Pax in the constellation, Lira.  We, the viewers, and the psychiatrist on his case, played by Jeff Bridges, aren't quite sure which is the more plausible hypothesis.  It's a wonderful movie.  It's funny and haunting and the acting is out of this world.  At one point, Bridges (playing Dr. Mark Powell) asks Spacey (playing Prot) about his alleged home planet:

Dr. Powell: What about societal structure?  Government.
Prot: No.  There's no need for one.
Dr. Powell: And you have no laws?
Prot: No laws.  No lawyers.
Dr. Powell: How do you know right from wrong?
Prot: Every being in the universe knows right from wrong, Mark.

This planet would be a better place if we allowed things that were immoral to be merely looked down on, rather than to be against the law.  The war on drugs presumes that if drugs are legal, people will take more of them because somehow, making them legal sanctions them.  Drugs, rudeness and hate speech and many other activities that some people view as immoral are best curbed by private sanctions not public ones.

I will let my co-host here discuss the distinction between law and legislation when the mood suits him.

Learn a New Word, and Re-enforce a Principle

Case Western Reserve Professor of Law and of Economics, Andrew Morriss, sent along this wonderful quotation from Anthony Trollope:

A faineant government is not the worst government that England can have.  It has been the great fault of our politicians that they have all wanted to do something.

    -- Phineas Finn