Cafe Hayek

Christmas in July

The New York Times reports (rr):

In the House, members voted 412 to 8 in favor of a highway measure packed with public works projects for every Congressional district in the nation.

Imagine that.  EVERY Congressional district.  We're all going to benefit!  Who were those eight courageous souls ashamed to bring pork home for the holiday?  I would think one of them was Jeff Flake:

"The transportation bill contains a record 4,000 earmarks, which is an ignominious achievement for Republicans," said Representative Jeff Flake, Republican of Arizona, referring to the pet projects. "I hope President Bush sticks to his guns and vetoes this bill; Congress could use the adult supervision."

But not to worry.

But Republicans heralded the two initiatives as a boon to the nation's employment picture. "This is about jobs, jobs, jobs, jobs," Representative Roy Blunt of Missouri said Thursday.

He should have said it eight times.  Saying it four times doesn't make it any more true.  Why stop there?

CAFTA Post-Mortem

CAFTA has passed the House two nights ago, 217-215.  Is that vote close enough for you?  The WSJ reports today (sr) on the implications for future trade agreements.  There's also a story on what was promised in exchange for recalcitrant members' votes:

Gary Hufbauer of the Institute for International Economics worries that by trading so many concessions for votes on Cafta, President Bush raised the cost for future deals. "The price was very high for such a small agreement," Mr. Hufbauer says. "Each time you do this, you have more claimants, and Doha could generate a record number of claimants that would make its passage all the tougher," he says, referring to the latest global round of trade negotiations in Qatar.

But here's the good news.  These trade agreements are not really free trade agreements, anyway.  (See my skepticism about CAFTA here.  See my relative optimism about CAFTA here and here.  The latter post has been updated to include a response from the critic of CAFTA I was criticizing.)

While I think CAFTA is basically a step in the right direction, there are two large costs to these types of deals.  The first is the bureaucratization of markets—the absurd negotiations over how little sugar we can allow in and all the side agreements on labor regulations and environmental restrictions.  The second cost is subtler—to sell these deals to Congress and the American people, the President and his henchpeople become mercantilists—they falsely argue that the benefits of the agreement and the increase in exports to Central America and all the jobs that will be created.  In this Alice-In-Wonderland world of pseudo-economics, exports are good and imports are bad.

So maybe it is time for the President (and future Presidents) to get less done in the near future and more done down the road.  Instead of trying to create free trade agreements with various countries and regions where we offer to open our markets (an alleged cost to the US) in  return for their opening their markets (an alleged benefit), maybe the President should take a different tack.  Argue for opening US markets unilaterally without creating a bureacracy around a specific negotiated agreement. 

Presidents will find it hard to make the case for opening our borders unilaterally to foreign products—the educational well has been poisoned by all the previous mercantilist rhetoric that has argued that exports are good and imports are bad.  I suspect George Bush and his predecessors who invoked that rhetoric know better.  Now, with CAFTA barely passing, maybe the political calculus will push Presidents to return to their role of representing all Americans rather than special interests such as sugar and steel.

M is for Managed

The WSJ (sr) reports on the latest maneuvering by the Bush administration to get CAFTA passed by the House:

Inching closer to House passage of a trade pact with Central America, the White House yesterday picked up the support of a small but crucial bloc of Southern Republicans after finalizing deals to address textile-industry concerns.

Under the agreement, which would bind the U.S. economy to five countries in Central America, as well as the Dominican Republic in the Caribbean, apparel made in the region can enter the U.S. duty-free if produced with American yarn and fabric. Critics say that loopholes in the pact would allow some fabric to come from China, diverting business from U.S. textile makers. The deals are designed to tighten those loopholes, ensuring, for example, that U.S. denim shipments to trouser makers in Nicaragua are preserved.

Phew.  What would the world come to if trouser makers in Nicaragua could use Chinese denim?

The deals are expected to secure five more legislators' votes for Cafta, as the Central American Free Trade Agreement is known, congressional and administration officials said.

So they call it CAFTA, do they?  Maybe we should call it CAMTA.

Ending Poverty

John Kay writes somewhat optimistically under the seemingly callous headline "Only the Poor Can Make Poverty History":

The good news about extreme poverty is that more people have been lifted out of it in the past 10 years than in any decade in world history; that this is mainly the result of rapid economic growth in China and India, which is in turn principally due to internal reform not external action; that the real contributions of rich countries have mainly been through trade and investment, not aid; and that world leaders have played only a minor though constructive role in that process. The lesson is that world poverty will be ended by the actions of poor people themselves.

HT to Tim Harford guestblogging at MarginalRevolution for the pointer to Kay's website.

Silly Rules

Patrick Hruby at ESPN.com discusses silly rules in sports that should be changed.  One of them is the intentional walk in baseball:

Let's see: Spend $60 on a ticket to watch someone not pitch to David Ortiz? No thanks. Better to grant each team a single intentional walk per game, the way the NFL doles out limited coaches' challenges. And when the pitcher decides to chicken out? Give the batter two free bases.

Really, why should a meatball artist get a near-mulligan because he can't get the likes of Barry Bonds out?

It's an interesting idea.  There's nothing more boring or depressing than an intentional walk.  But like a lot of good ideas, it sounds great until you think about implementation and enforcement.  How would you actually implement a ban on the intentional walk?  If you ban what is now the intentional walk—a play where the catcher stands up, stretches out his arm and signals for a ball outside the strike zone, teams would counter the rule with what is called a semi-intentional walk.  You simply make every pitch very unattractive. 

In this world, an intentional walk would become a judgement call on the part of the umpire—a decision that would allow the umpire to award the batter, say, second base in the event of a perceived intentional walk.  If you dislike an intentional walk now, how much would you dislike an umpire making that call?  My guess is that it would never happen.  It would become a rule that would never be invoked similar to the option the umpire has to keep a batter at the plate after being hit by a pitch if the umpire feels the batter did not attempt to evade the pitch.  (Though I did see such a call in my kid's little league game this year.)

If you really want to get rid of the intentional walk, it would be better to use cultural norms rather than explicit rules.  Mock the pitcher and the manager for their lack of courage.  In fact, this used to be the norm of baseball.  When Babe Ruth and Ted Williams were at the top of their game, it may have made sense to walk them every time and not just when there was a man on second, or late in the game at a potential turning point.  But it just wasn't done.  It would have been considered gauche.  And a good thing.  That norm evolved in a Hayekian way to help baseball become more interesting.

So why did that norm die?  Maybe it didn't.  Maybe I'm wrong about the phenomenon.  But if I'm right, my guess is that it got harder to sustain that norm when more was at stake as it is today in the modern game where salaries of pitchers and managers are higher and being perceived as courageous is too costly.

UPDATE:  In 1957, when Ted Williams was slugging .731 and his batting average was .388, he was walked intentionally 33 times, or about one in every 14 plate appearances.  Last year, Barry Bonds slugged .812 and hit .362.  He was walked intentionally 120 times, or roughly once every four plate appearances.  as far as I can tell, baseball did not keep track of intentional walks before 1955.  All stats courtesy of Baseball-Reference.com, an extraordinary site for stats.

UPDATE: Reader Neema Salimi points out that one way to enforce the rule without being arbitrary is to penalize a four-pitch walk.  The batter could be awarded two bases.  Or a runner on second or third could be allowed to advance on a four-pitch walk.  It's an interesting idea.  It does punish the pitcher who is trying to throw strikes but is simply having control problems.  It would lead to a lot of good pitches on a 3-0 count.  And on 2-0 as well.  So while it would get rid of the intentional walk, it would have some additional effects on offense.

Rolling in their Graves

There's a restaurant in San Francisco callled the Mao Zedong Village Cuisine Chinese Harvest Restaurant.  I got a surreal kick out of the evil monster having a restaurant named after him—you try and save the world and your legacy is a joint in SF, CA.   One online reviewer of the restaurant had a different take:

mao zedong was a ruthless dicator responsible for the death of millions in the cultural revolution and the failed great leap forward. why on earth would any restaurant celebrate the death and misery that this man represents? would you patronize Hitler's Hamburger Haven, or Osama's Oyster Bar? if the idiot owners of this restaurant did their research, they would realize that a significant number of richmond district residents fled china to escape communism and mao zedong. this restuarant's name is highly offensive.

Hmm.  Good point.  I suspect the owners have a different impression of Mao's legacy.  The disconnect between the man and the monument did remind me of this NJ rest stop.

UPDATE:  From Nacim Bouchtia comes this photo, from a restaurant in Santa Monica:

Inside he found propaganda posters. So that's two and counting.  Restaurants named after Mao (but not Hitler) illustrate the puzzle raised by Anne Applebaum in her superb book, The Gulag—romanticizing Nazis or their regime is socially unacceptable.  Why is it okay to romanticize Communists and Communism?

Immobility?

The WSJ has run the last article (sr) in their series Moving Up: Challenges to the American Dream.  It's the story of a Mexican who entered the US illegally:

In the late 1960s, Mexican peasant Hector Lara successfully crossed the U.S. border on his third try and arrived here as a penniless illegal immigrant. Mr. Lara worked long hours at a variety of jobs -- from manufacturing to yard work -- to support the wife and four children who later joined him from Mexico's Jalisco state. Like millions of immigrants before and since, the Lara family took its place on the bottom rung of the U.S. economy.

More than 35 years later, each of the Lara children -- including a fifth child born in the U.S. -- has earned a degree from a higher-education institution in the U.S. Three earn six-figure salaries.

That sounds pretty good.  And it's not just the kids who did well:

"We're all very comfortable," says Alejandro Lara, a 33-year-old investment banker who drives a BMW. He has a college degree from the University of California, Berkeley, a master's from Harvard and an M.B.A. from UCLA. Even his parents have joined the middle class: They bought two houses, now worth $800,000, with money earned during the 1970s when the senior Mr. Lara operated a forklift at a record factory and his wife, Elvira, stitched hems at a drapery maker.

Turns out, immigrants do a lot better than most people seem to think:

The Laras' rise may be more typical than many people imagine when they see the flood of Mexican immigrants arriving here to take menial jobs. A growing body of research suggests that the children of these immigrants have made big strides in education, the ticket to upward mobility, and have often moved beyond the poverty of their parents. "The success of immigrants' children is key to measuring the long-term costs and benefits of immigration," says David Card, an economist at UC Berkeley. He published a paper in January that concludes children of even the least-educated immigrant groups close most of the education gap with natives.

Based on this evidence, you'd think America is still a place where hard work can pay off.  Not so fast.

That conclusion offers a contrast to some other powerful forces shaping mobility in America today. Overall, amid a widening rich-poor gap, the level of mobility in the U.S. has been stuck over the past three decades, and some studies suggest mobility in continental Europe is higher. The decline of on-the-job training and industrial jobs where a high-school graduate could climb the ladder are among the reasons that some Americans have trouble advancing, even as the spread of college education has helped others.

The key sentence:

Overall, amid a widening rich-poor gap, the level of mobility in the U.S. has been stuck over the past three decades, and some studies suggest mobility in continental Europe is higher.

What does that mean?  What does it mean to say that the level of mobility in the U.S. has been stuck over the past three decades?  The article goes on to say:

As immigrants and their offspring live in the U.S. longer, they also tend to improve their lot financially. In California, 28% of Latinos who arrived in the 1970s had incomes below the poverty level in 1980. By 2000, the rate for the same group had fallen to 17%, according to research by demographers Dowell Myers and John Pitkin for the University of Southern California. Home ownership for the group rose to 55% from 15% over that 20-year period. (By comparison, the national home ownership rate today is 69%.)

Sure seems like a lot of mobility to me.  Is it possible that the measured rich-poor gap and the measured level of mobility are inaccurately measuring what is really going on in the U.S.?  Note the following about Mr. Lara, the centerpiece of the article:

For years, home in Los Angeles was a crammed one-bedroom apartment. Mr. Lara worked at the record factory, where he earned $2.13 an hour doing everything from hauling boxes in a warehouse to quality-control work. He also took side jobs elsewhere.

The bottom line is that you have to follow people over time rather than simply looking at averages.  Averages are contaminated by changes in other characteristics in the sample.  Two of the most important over the last three decades are the increase in households headed by single men women (due to an explosion in the divorce rate starting in the early '70s) and the increase in immigration in the '80s and '90s.  How important these two factors are in biasing average measures of income downward is an empirical question.  But when you do follow people over time, you see that their economic situation improves dramatically.  I will try and share some of that evidence in a future post.

Here is the paper on immigration by David Card that the article mentions.

Everyday Low Prices

For years there has been a battle between stores that regularly put a subset of items on sale and stores that don't.  When I lived in St. Louis, the big battle between department stores was between Dillard's and Famous-Barr.  Famous-Barr had sales every two weeks.  You would see their multi-colored circulars in the newspaper offering "specials."  At Dillard's, there were basically no sales.  Their average prices were lower while the prices at Famous-Barr would be lower on those items that were on sale.  Famous-Barr made money on people buying the non-sale items.  Or at least that's how I remember it.

I once got to hear Mr. Dillard, the CEO of Dillard's explain why his strategy was better.  The basic point was that Famous-Barr would be thronging with customers when their sales were on and relatively deserted when prices were high.  But the sales staff couldn't be adjusted to meet those customer flows—it was too expensive to be constantly altering the size of the staff.  So basically Famous-Barr always had either too many employees or too few.  Mr. Dillard felt that his strategy was best in the long-run because he could provide better customer service.

Everyday low prices is part of the reason Wal-Mart has crushed lots of chains that were "sales-driven" having booms and busts in sales and having to cope with the customer service challenge that Mr. Dillard discussed.

Now comes news that low prices are dominating sales in the grocery business.  The WSJ (sr) reports:

Bowing to busy consumers who are less willing to spend time searching for deals, some traditional grocery stores are cutting back on promotional discounts and moving toward the everyday low prices of Wal-Mart Stores Inc. and other discounters.

In recent months, several regional grocery chains have reduced prices on everything from Kraft macaroni & cheese to Ragu pasta sauce in an effort to lure back shoppers who have defected to discount grocers. In most cases, the stores also stopped offering weekly bargains on items like cereal or yogurt.

For decades, most traditional supermarkets have lured price-conscious shoppers with cheap weekly specials and made up the lost profit by keeping nonsale prices substantially higher. Now, the prevalence of shops such as Costco Wholesale Corp., dollar stores and discounters such as Wal-Mart has conditioned consumers to expect inexpensive goods every day.

Only a third

Is this good news or bad news?

Study Finds One-third of Medical Studies are Wrong

Hitting .667 makes you the greatest hitter of all time.  But we'd hope for a slightly higher success rate in science.  From the article (ht: techcentralstation):

New research highlights a frustrating fact about science: What was good for you yesterday frequently will turn out to be not so great tomorrow.

The sobering conclusion came in a review of major studies published in three influential medical journals between 1990 and 2003, including 45 highly publicized studies that initially claimed a drug or other treatment worked.

Subsequent research contradicted results of seven studies -- 16 percent -- and reported weaker results for seven others, an additional 16 percent.

That means nearly one-third of the original results did not hold up, according to the report in Wednesday's Journal of the American Medical Association.

If 1/3 of all peer-reviewed findings in the most prestigious journals are either flat-out wrong or overstated, what do we make of this article from last week from Reuters:

Unborn U.S. babies are soaking in a stew of chemicals, including mercury, gasoline byproducts and pesticides, according to a report released on Thursday.

Although the effects on the babies are not clear, the survey prompted several members of Congress to press for legislation that would strengthen controls on chemicals in the environment.

The report by the Environmental Working Group is based on tests of 10 samples of umbilical-cord blood taken by the American Red Cross.  They found an average of 287 contaminants in the blood, including mercury, fire retardants, pesticides and the Teflon chemical PFOA.

"These 10 newborn babies ... were born polluted," said New York Rep. Louise Slaughter, who spoke a news conference about the findings on Thursday.

"If ever we had proof that our nation's pollution laws aren't working, it's reading the list of industrial chemicals in the bodies of babies who have not yet lived outside the womb," Slaughter, a Democrat, said.

There is no mention of how the ten (10!) babies were chosen.  Randomly? Were they the first ten that were examined or perhaps the worst ten?  Were their mothers smokers?  Where did they live?  How much of each of the 287 toxins were in the blood?

Maybe none of that matters.  Maybe one molecule of one chemical in one baby is one too many.  But the end of the article unintentionally hints at a different story line:

Slaughter had similar tests done on her own blood.

"The stunning results show chemicals daily pumping through my vital organs that include PCBs that were banned decades ago as well as chemicals like Teflon that are currently under federal investigation," she said in remarks prepared for the news conference.

"I have auto exhaust fumes, flame retardant chemicals, and in all, some 271 harmful substances pulsing through my veins. That's hardly the picture of health I had hoped for, but I've been living in an industrial society for over 70 years."

Poor Louise Slaughter.  Condemned to grow up in an industrial society for seven decades.  It's a miracle she's still alive.  Or maybe not.  Maybe one of the reasons that she's still alive is precisely because she has lived in an industrial society for over 70 years.  Paradoxically, living in an industrial society extends your life span.  True, you get contaminated blood.  But evidently, Louise is not the exception.  Lifespans for all of us in industrial societies have been climbing over the last 70 years as all that awful stuff continues to pulse through our veins.  Either it's not as bad for us as it sounds or maybe there are benefits of an industrial society that make it those poisons in our blood worth having.

Here's a map and article on life expectancy around the world.  The bottom line:

As you can see from the map below, more developed regions of the world generally have higher life expectancies than less developed regions. The regional variation is quite dramatic.

Capital Freedom

I am delighted and proud to announce that another George Mason University student is actively contributing to the blogsosphere.  Check out, enjoy, and learn from Capital Freedom, whose proprietor learned her economics at GMU!

Emoting With Big Banners

Here's further evidence that government schools are to learning what war is to truth: in Florida, politicians are doing their level best to cram patriotic fervor into kiddies' hearts.  Here's the story.

Thanks to Brad Hobbs for the pointer.

Disgust at the 'Drug War'

I challenge anyone to read this column by John Tierney and not feel disgust at the disgraceful consequences of the so-called ‘war on drugs.’ (If you don’t feel disgust, then you are emphatically someone with whom I want nothing to do. And I certainly don’t want you to have any role -- not even as a voter -- in determining how I live my life.)

Tierney visited a 46-year-old prison inmate – a wheel-chair-bound man serving a 25-year sentence in a high-security Florida prison because he had the effrontery to seek relief from excruciating pain caused by an automobile accident that damaged his spinal cord.

I’ll be more precise: this man had the gall to seek pain relief that isn’t government approved.

To all those people who support the ‘war on drugs’, I ask: are the ugliness, the cruelty, and the dangers that you imagine will result from ending the ‘war on drugs’ worse than the actual ugliness, cruelty, and dangers that attend the ‘war on drugs’? I doubt that you can answer an informed ‘yes.’

Chavez and Other Beasts

Marshall Stocker, an investment manager in Ithaca, New York, wrote this very nice op-ed appearing in yesterday's Ithaca Journal. In it, he compares Venezuela’s president Hugo Chavez with Cuba’s chief hombre Fidel Castro – concluding, sadly but correctly, that Chavez has all the markings of his elder thug-in-chief.

Reading Mr. Stocker’s account of the goings-on in Venezuela makes me sad and angry.

The age-old question, of course, is why. Why do people tolerate arbitrary power exercised by other people – and endure the barbarism that the exercise of such power inevitably unleashes?

I have no answer, just this thought: Castro, Chavez, Mugabe, Mao, Hitler, Mussolini – you name the head-of-state thug – derive much of their power from childish sentiments.

We in the west today romanticize childhood. We think of young children as innocent, frank, and cute. Of course, they are these things to a large degree, especially when being raised in protective middle-class homes. But children naturally, even more than most adults, hold simplistic notions of reality.

Their first instinct is to seize whatever it is that they want. If little Bobby has a toy car that catches little Tommy’s eye, little Tommy reaches out and grabs it from little Bobby. Little Bobby naturally resists. A fight breaks out, with whining always and sometimes even flailing limbs on both sides, until an adult intervenes or until one or the other demonstrates decisive physical dominance.

When Bobby and Tommy are a tad older, say 11 or 12, one of them – usually the one who is most popular with other classmates or playground mates – will taunt and harass the other. Mostly this bullying is done with words, but often it involves pushing, shoving, grotesque practical ‘jokes,’ and even sometimes blood-letting violence. The bully feels important and powerful, having lorded himself over another and receiving in return the praise and admiration of other children who join in the general schoolyard contempt for the bullied child.

What is government, especially of the sort headed by Chavez and Castro, but institutionalized grabbing and glorified, high-intensity bullying? "Party A has stuff that I want, either for myself of for my friends. I have the army. I’ll just grab it" – so he does. And if anyone dares resist, well too bad: black-eyes for them (if ‘them’ are so lucky as to suffer only black-eyes).

It’s the easiest thing in the world to imagine problems (real and fantasy problems) solved by brute force. Even children can imagine such a solution.  B is poorer than A, force A to give some of what he has to B.  Problem solved. C doesn’t live like you think she ought to live – she smokes too much dope, she worships the wrong god, her sexual practices aren’t to your taste – no problem; unsheathe your sword, point it at her throat, and order her to change.  Problem solved.  D dares challenge your political power – now that’s really bad; shoot him in the name of protecting society.  Problem solved.

If children were never civilized by their families – if we all grew up into our hormone-suffused bodies untamed - we’d be hairy and breasted children. Actually, no. We’d be worse. Children as we understand them are uncivilized only temporarily. Parents and families civilize them; there’s hope for children. There’s no hope that bastards such as Hugo Chavez, Fidel Castro, Robert Mugabe will ever grow up. They’re big and murderous and will be that way for as long as they breathe.

Fake Story at the Times

In this story in yesterday's New York Times (rr), Eduardo Porter reports more gloomy news for average Americans.  The headline:

How Long Can Workers Tread Water?

Pretty scary metaphor.  After opening with a paragraph about James Barnes, a security guard who has taken a second job delivering newspapers just to get ahead, we get this summary of economic life in America:

The wages of typical workers are treading water, growing roughly at the same rate that inflation eats into their buying power. Last week, the Labor Department reported that average wages for production and nonsupervisory workers in the private sector, about 75 percent of the labor force, reached $16.06 an hour in June, just 2.7 percent above the level a year ago.

If correct, that is disappointing news.  We'd prefer growth to stagnation.  But the news is even worse:

Workers' wages may be barely keeping up, but Americans' average incomes are growing briskly - in part, because of growth in the overall number of jobs, including Mr. Barnes's extra one. But it also reflects other forms of income, flowing mostly to the more affluent, which are fueling the consumer spending that has provided a crucial pillar of support for economic growth over the last three years.

Will this chorus ever cease?  After their mammoth, inaccurate series on inequality, the Times is hammering home the point they have been making for decades: sure times are good, but only for a tiny slice at the top.  The rest of us get crumbs.  There's only one problem with this chorus.  It isn't true.  At least it isn't true based on the numbers provided by the Times.  Here's the chart:

The chart shows two lines.  The first is the growth rate in average hourly wages for production and non-supervisory workers.  These workers make up about 75% of the economy.  The line is basically flat, growing between two and three percent a year, roughly equal to the rate of inflation.  But the key comparison is to the other line in the chart, the growth rate in what the chart calls "employee compensation (wages and benefits)."  This number is for all workers and it's going through the roof.  It's growing at well above the rate of inflation, at 4 and 5 and 6 and even 7% on an annual basis.

Porter's implication is that while the bottom 3/4 of the work force is treading water, the top 1/4 is living like Croesus.  Here's the text in the chart:

While wages for ordinary workers are barely keeping up with inflation, overall incomes are up sharply because of a growing number of jobs and higher pay among the upper ranks.

So what the reporter wants us to conclude is that when you look at wages for the bottom 3/4 of the economy, they're flat.  But the data that looks at all workers is zooming upward.  So that means all the gains are going to the people at the top.

Unfortunately for the reporter these data tell us nothing of the sort.  I spoke to the reporter.  The dramatic zooming line in the chart is taken from this table from the National Income and Product Accounts (NIPA), gathered by the Bureau of Economic Analysis.  It's the growth rate in total compensation paid out in the US economy.  It's wages plus benefits.  So the first apples and oranges problem is that the zooming line includes benefits and the flat line doesn't.  Porter conceded that problem, but pointed out that even when you look at just wages and salaries, they're zooming in a similar fashion.  He's right.  But that number has a different apples and oranges problem.  He's comparing average hourly earnings, a per worker measure of compensation to the total payments made to all workers, an aggregate measure.  It includes increases in number of jobs per worker, increases in the number of workers, raises and so on.  It shouldn't be compared to average hourly earnings.  (It also uses a totally different methodology to compute the numbers, one that may not be terribly accurate for measuring employee compensation, but never mind.)

So the bottom line of the story is an anecdote about ONE worker who has taken a second job, a claim that workers are treading water because wages are just keeping up with inflation (ignoring the role of benefits in total compensation), then another fact that is not quite comparable but provocative that suggests that the most affluent workers might be doing very, very well.

How did this story get written?  Who thought of the idea of trying to frame the recent numbers on average hourly earnings as a story on increasing inequality?  I'd like to know.  I don't think Eduardo Porter had an idea to use total compensation aggregated across all workers from the NIPA as a way of framing this story as an example of growing inequality.  I would guess he called one of the sources in the story to talk about the average hourly earnings numbers, maybe someone from the ubiquitous Economic Policy Institute which is quoted twice in the story, and the source said, hey, why not use these data from the NIPA accounts?

No skeptical voice is quoted in the story saying that perhaps these numbers are not really comparable.

Today, comes the news that inflation was flat in June.  From the Washington Post (rr):

With no inflation to offset pay gains, real average weekly earnings for most U.S. workers rose 0.2 percent last month from their level in May, the department said in another report. They were up 0.4 percent in the 12 months that ended in June, the first yearly gain since September.

When the average hourly earnings data are updated, they'll be up too.  So the treading of water is over for now.  Good thing the Times ran its story yesterday.

Caplan and Durant on Why All the Foolishness

My brilliant young colleague Bryan Caplan -- now a serious presence in the blogosphere, at EconLog – recently penned a post that reflects much of his professional research. The title of this post is wonderfully descriptive of its content: "Rule By Fools Is the Rule."

Bryan’s post reminds me of one of the many insights offered by Will Durant. This one is from page 1,031 of his 1950 book The Age of Faith:

There are few things in the world so unpopular as truth, and the backbone of men and states is a concatenation of romance.

Very sad; very true.

Postrel on Edmonds on Child Labor

In her column appearing in today’s New York Times, Virginia Postrel offers her usual superb fare. In it, she discusses the research of Dartmouth economist Eric Edmonds, who focuses on child labor.

The most important lesson is one that should be obvious to anyone who thinks seriously about this matter, but nevertheless seems to be lost on many well-meaning folks – namely, if children in very poor countries aren’t working in factories, they’re likely to be working on farms. Child labor exists largely because families in underdeveloped countries are poorer than Americans can imagine. In short, child labor is a symptom of deep poverty, as well one of the (admittedly less pleasant) means of helping families escape deep poverty.

I lectured this past weekend at an IHS seminar. A few of the outstanding students in attendance questioned my support of free trade with countries in which children work in factories. To these students, such labor is evil and should not be encouraged or even tolerated. (I think I’ll e-mail to these students this Postrel column.)

"What’s the alternative?" I asked these students.

Asking such a question sounds callous. But if the alternative to working in a factory is working on a (probably subsistence) farm, two thoughts should spring immediately to mind: (1) in societies in which child labor is prevalent, children will labor somewhere, even if regulations and trade sanctions remove them from factories producing goods for export to rich countries – locking children out of factory work does not thereby send them home to watch tv, practice piano, read Roald Dahl, or help grandma bake muffins; (2) farm work isn’t necessarily safer or more pleasant than factory work – perhaps it is better in some dimensions (maybe even in most dimensions); my point is that farm labor shouldn’t be romanticized just because it’s done outdoors with furry or feathery critters (who kick, bite, defecate, and attract vermin and insects).  If reliable data could be gathered, I'd bet that they'd show that farm labor in such countries is almost as dangerous and unpleasant as is the typical job performed by a child laborer in a factory.

Why Wal-Mart Pays Less

I was talking to a journalist the other day who told me that Wal-Mart didn't pay much so they could keep prices low.  He was worrying about Wal-Mart's influence on the wage and benefit structure.  Wal-Mart employs about a million people.  That's a lot of people, but it's a small fraction of the total US employment which is about 140,000,000.

I think a lot of folks think that Wal-Mart doesn't offer health insurance to all of its workers because Wal-Mart's mean or greedy or too interested in profits.  A lot of people are mad at Wal-Mart because they pay less than the average wage in the economy.

There's a simple way to look at it.  Wal-Mart doesn't offer health insurance or pay more than they do because they've found that they can attract enough workers with the pay package they currently offer.  Period.  For other companies, they have to offer health benefits to attract workers.  They reason they offer health insurance isn't because they're socially responsible or kind or altruistic.  They find that to compete for workers they have to offer it.

Paradoxically, Wal-Mart doesn't determine what it pays its workers or what benefits it offers any more than you can set the price of your house when you want to sell it.  Suppose houses of similar quality and location sell for $500,000.  You're free to set any price you want, but if you set a price of $1,000,000, you're going to wait a long time for a buyer.  Oh, you might get a slight premium above $500,000 because you did such a nice job renovating your kitchen.  Or maybe a little less if your taste in kitchen's is real different from most people's.  You don't set the price of your house.

Wal-Mart is in the same situation.  They don't determine the compensation of their workers in any real sense.  The compensation of their workers is set by the market for people of a particular skill level and the alternatives in the work place available to workers of that skill level.  What Wal-Mart does have some control over is the level of customer service and knowledge and skill used by their workers. 

In general, the warehouse stores, Wal-Mart's Sam's Club and its biggest competitor Costco, pay their workers more than the standard discount retailers such as Wal-Mart, Target and K-Mart.  I assume the reason for this is that the level of skills those warehouse stores require is higher.  Maybe it's because you have to be able to drive a forklift or do other stuff that's necessary in a warehouse store.  But it's not because the head Sam's Club is a nicer person than the head of the regular Wal-Marts.

Attempts to force Wal-Mart and similar stores to offer benefits or raise wages is going to punish the people with the lowest skill levels because it will diminish the choices available to them.  Wal-Mart will find ways to substitute capital and technology for people.  The people who remain employed there will make more money.  That will be seen.  What will be unseen is the reduction in wages elsewhere in the economy.

Russ Roberts in Kudlow's Company

The Cafe's Russ Roberts was a guest on yesterday's Kudlow & Company.  Here's part of the transcript:

KUDLOW: Russell Roberts, I want to read what you posted on your blog site, Cafe Hayek. I quoted it in my column this week. It's about trade deficits with China and elsewhere. And you say that the US has run a merchandise trade deficit for every year since 1976, trillions of dollars of deficits. And since 1976 the US economy has created over 50 million jobs. Now that is an incredible set of factoids. The trade deficit doesn't stop us from creating jobs. So why is everybody bashing China, Russ?

ROBERTS: Well, a trade deficit's an incredible red herring. It's a very useful tool for people who want to advance their own self-interest at the expense of the nation as a whole. When we run that trade deficit, we're importing more from overseas than we're exporting. People find that frightening. That's actually to our benefit. It's the same thing as running a capital surplus, which means the United States is a good place to invest.

As long as we're a healthy economy, we have a stable currency, a stable political situation, we're going to run trade deficits year in, year out. And there's nothing wrong with that. Trade with China is good for us. It's extremely valuable to let them make our toys and our watches and our shoes and anything else they can make better than we can make. That means we can make other things for ourselves as well. So it's a--those issues, such as China, their currency, the threatened tariffs on them--those are all extremely dangerous things.

On air with Russ was Michael Darda. Chief Economist at MKM Partners.  Darda has these wise words (consistent with Larry Kudlow's own wisdom on the matter) about the scarlet-red herring that is the issue of China's alleged manipulation of its currency (the Yuan).>

KUDLOW: You know, Mike Darda, it strikes me that the United States has been a greater currency manipulator. I mean, China has pegged with the currency board to the dollar for now 10 years. They're on their 11th year. But the US dollar, to which they're pegged, went up about 50 percent, and then it went down about 27 1/2 percent or 30 percent. So who's manipulating what?

DARDA: Right. Exactly. Great point, Larry. The fact of the matter is they're fixed to the dollar. The dollar floats. So if they want to charge someone with manipulation, it's actually Alan Greenspan. So, you know, I think that entire bill, that Schumer-Graham bill, is prefaced on a false assumption. I listened to him on your show, and he said that in order to have trade--or free and open trade, you need a floating currency. Well, apparently he missed the last 200 years of history because the fact of the matter is all through the 18- and most of the 1900s we had fixed exchange rates...

KUDLOW: Right.

DARDA: ...a gold standard and free trade. Tariff barriers went up and down, you know, and so forth. But we had a massive expansion of trade before World War I with fixed currencies and then after World War II during the Bretton Woods arrangements. So it's just ridiculous.

Thanks very much to Larry Kudlow for inviting Russ to appear on his excellent program -- and, more importantly, for so effectively arguing the case for free trade.

Take Easy Shots if They're All You've Got

William Butterfield has a point: my and Arnold Kling’s posts on the futility of foreign "aid" to African governments are "easy shots." The real challenge is to discover and describe ways to enable ordinary Africans to achieve lasting prosperity. Saying ‘let them have capitalism!’ and ‘government policies are likely to fail now just as they have in the past’ is indeed easy. But as long as many prominent folks pontificating atop tall soapboxes don’t yet see these easy truths, repeating them is likely worthwhile – and made even more worthwhile if there’s little evidence that a large portion of the soapbox-pontificators’ audience is also unaware of these easy truths.

I’m less confident than Bill about the efficacy of western donors paying directly for desirable policy changes (such as reductions in the time and red-tape necessary to open businesses in Africa). And I am certainly not one who believes that trade rather than aid is the key to more prosperity. While it's desirable for a number of reasons for western governments to stop protecting their domestic producers from potential African competitors, until Africans begin on their own to develop a civil society – a society in which advanced commerce and wealth accumulation by non-elites is tolerated, a society more honest than corrupt, a society governed more by the rule of law than by the fists of tyrants, a society in which science and rational thought enjoy at least as much respect as mysticism – Africans will remain mired in oppressive poverty.

Stopping the flow of foreign aid is likely a necessary, if not a sufficient, step toward encouraging the organic growth of civil society in Africa.

Yes, yes – it’s true that all of the above is easy to say. Beyond our cutting off our subsidies to the tyrants and bureaucrats who inevitably obstruct ordinary-people’s efforts to create civil society from the ground up, I do not believe that there exists a recipe for western action that will help ordinary Africans.

I’m reminded here of one of H.L. Mencken’s aphorisms. I offer it to the Bonos, the Blairs, the Bushes, the Sachses, and all others who fancy that this time rich-governments' $$$, £££, ¥¥¥, and direction will help ordinary Africans : "The fact that I have no remedy for all the sorrows of the world is no reason for my accepting yours. It simply supports the strong probability that yours is a fake."  (On page 63 of H.L. Mencken, Minority Report.)

The Great Job Rain Forest

In my earlier post on job creation, I lazily opened with this line:

The US economy grows jobs steadily.

It's a standard way of thinking about the economy as an engine or machine that creates jobs the way a factory makes cars.  The sentence conjures up an image of the economy as something over there, separate from the rest of us.  When the economy is healthy, it creates jobs.  When it's unhealthy, it struggles to create jobs or worse, destroys jobs.

It's a very misleading metaphor.  Job creation is the result of millions of decisions made by millions of people pursuing dreams and profits.  When the environment for pursuing those dreams encourages risk-taking, jobs get created as long as people want to work.  When the environment discourages risk-taking, people who want to work may not find it as easily.

Job creation in the United States is a function of population growth, the incentives for work and investment built into our tax system, our culture and the demographics of the work force.  It has little or nothing to do with the wisdom of the President.  I hate it when a President says something like "My administration has created x million jobs."  Job creation has little or nothing to do with the wisdom of Alan Greenspan (though he, like the President can muck things up with indecisive or erratic decisions).  It has little or nothing to do with the trade deficit or China.

A similar confusion occurs when we talk about creating "high-paying jobs" as if jobs were boxes and your salary depends on which box you're working in.  Your salary depends on your skills and your alternatives.  If you don't understand this, you think that something is wrong with Wal-Mart because its salaries are below average.  Wal-Mart's salaries are below average because its work force, on average, has below average skills.

Much of these misunderstandings come from our desire to believe that every phenomenon that exists must be the result of someone's conscious desire that it exist.  One of the greatest lessons from reading Hayek is that there are things that are the result of conscious action on our part, there are things that are not consciously designed and then there are things that are in between—phenomena where there is conscious planning by some individuals but no one individual or group consciously controls the full result.  Wages and prices are examples.  You may think you set the price of your house when you put it up for sale, but if you wish to actually sell it, you have to set a price that reflects competing houses of similar quality that are on the market.  No one sets the market price of houses.  It emerges from the decisions of buyers and sellers made in the environment of regulations and taxes in a particular housing market.

The amount of income inequality is another example.  Just because we can measure a particular level of income inequality at a point in time, does not mean that someone has chosen it.  It is the result of millions of decisions.  We can influence the amount of inequality through public policy just as we can influence the prices of houses in the Washington, DC area.  We can change tax policy or employment regulations to encourage or discourage job creation.  But because the economy is not a box factory, attempts to change the environment of job creation are likely to have unintended, unpredictable consequences.  The economy is not an engine where more gasoline or more oxygen have predictable consequences for the speed of the engine and little else.

The lesson here is to avoid metaphors taken from physics and engineering that are inevitably cause and effect metaphors and think instead of metaphors from biology where results emerge from the actions of multiple interactions in a complex system.  Think rain forest not engine.

At least I said in that earlier post that the economy "grows" jobs.  Sounds something like a rain forest.  But the problem isn't the verb.  It's the noun "economy" doing the growing like a farmer  growing wheat.  The economy can't do things.  It is the result of individuals "doing."

Doing Each Others Laundry

The US economy grows jobs steadily.  The job market has been doing pretty well for the last 50 years, adding jobs effortlessly for the explosion in the labor force participation of women and in the last 20 years, effortlessly absorbing a large increase in foreign born workers. 

The doom and gloomers like to claim the the trade deficit or China is bad for US workers, but they can't explain the steady growth in employment.  For example, the US has run a merchandise trade deficit for every year since 1976, trillions of dollars of deficits.  And since 1976, the US economy has created over 50 million jobs.  The doom and gloomers then ask "But what kind of jobs?"  As the manufacturing sector shrinks and the service sector expands, the d and g'ers like to say that eventually, we'll be stuck doing each others laundry.  The implication is that we stand on the edge of a precipice, our standard of living imperiled by Japan or Mexico or China or India or the deficit or multinational corporate greed.

The Wall Street Journal has a story today (sr) on which sectors are expanding and contracting since June 2003.  So here is some fairly substantial evidence on the question of which kind of jobs the US economy is creating in the latest economic expansion.

Here are the sectors that are expanding:

Some of them are service jobs that pay below the average.  Some are service jobs that pay above average.  Some are in construction.  Some are in mining.  Some are in architecture.  Health services.  Computer design.  They're from all over the economy.  Some are good jobs.  Some are great.  Some not so great.  There's also these great numbers:

According to data compiled by UBS Securities, in the past year, the economy has produced 899,000 jobs in industries in which average wages exceed the national average of roughly $15 an hour, such as Internet publishing and engineering. It has produced 905,000 jobs in industries with below-average wages, such as food services and building-supply retailers.

Not surprisingly, about half of the jobs are in above-average paying sectors.  About half are in below-average paying sectors.  Of course this tells you nothing of what has happened to the actual average.  Some sectors with below average pay have created jobs that pay above the average and some high-wage sectors have created jobs with below average pay.  But the point is that a growing economy creates all kinds of jobs.  In truth, the wages attached to those jobs depend on our skills and the market for those skills.  Those wages are enhanced by trade and by most of the things the doom and gloomers complain about.

Kling on Poverty

I highly recommend this essay at TechCentralStation, by Econlog's Arnold Kling, on fighting poverty.

Tierney and Pape on the 'War' on Terror

Read these two articles – here, and here – that appear in the opinion section of today’s New York Times. Read them twice. Three times. They are about the London bombings and the war on terrorism.

The first is by the Times’s stellar columnist John Tierney, who wisely if unpopularly says:

it's clear that no one can stop terrorists from killing. Spending billions on airport security has simply diverted them to transit systems, and spending billions on transit systems could at best divert them somewhere else: stores, restaurants, sidewalks. Terrorists don't even need bombs. They could simply adopt the [October 2002 Virginia] snipers' technique for spreading fear.

President Bush briefly admitted last summer to Matt Lauer that the war on terror couldn't ever be won, but he got so much criticism that he promptly backtracked. It was a textbook Washington gaffe: perfectly true but terribly inconvenient.

It was inconvenient because politicians like to promise a cure for any problem in the news, especially if the cure means dispensing money to constituents and campaign contributors.

Promises to halt terror have turned homeland security spending into the biggest porkfest in Washington, and the London attacks have inspired calls for still more spending.

Washington obviously has a role in hunting terrorists and protecting the borders, but it can't stop small-scale attacks like the ones in London, no matter how much money it gives to each Congressional district.

Many people dismiss such advice because they insist on believing that there’s some level of "toughness" – some degree of fierce belligerence by Uncle Sam – some volume of American blood and guts and mothers’ tears – some regrettable-but-necessary sacrifice of freedoms – that can and eventually will ‘win the war on terrorism.’

The second article is by University of Chicago political scientist Robert Pape. In his book Dying to Win, Pape presents detailed research on the pattern of suicide bombings since 1980. (I know, I know: we have no evidence yet that the London bombs were toted by persons who were suicidal.) Pape's conclusion is clear: these people terrorize western nations not because we are free, rich, or morally degenerate. They terrorize us because of our foreign policies.

The best way to prevent these people from terrorizing us is for Uncle Sam to pull his troops out of the middle east.

I leave, at least for now, to others to debate if such a move would be ‘giving in to terrorists.’ I content myself here merely to point out that if a government has any legitimate functions, surely the most central of these is to protect its people from violence inflicted by foreign invaders. If Uncle Sam’s current foreign policies promote such invasions of terrorists (as Pape’s evidence suggests), then Uncle Sam’s first duty – if it truly puts the welfare of Americans first – is to have its garrisons and guns scram from the middle east ASAP.

Sjostrom on Krugman

I’m lecturing this weekend at a seminar sponsored by the Institute for Humane Studies (IHS). (IHS is one of the planet’s finest resources for young scholars. If you haven’t yet visited their website, do so ASAP. You’ll be impressed with the range and quality of their activities.)  (Full disclosure: I serve on IHS's board of directors.)

Anyway, just before heading out to the seminar, I read Paul Krugman’s column in yesterday’s New York Times. Oh how I wanted to blog on it! But time wouldn’t permit.  So on my drive to the seminar, I called the Cafe’s co-proprietor, Russ Roberts, and encouraged him to blog on it. No time – Russ is leaving on Sunday for a six-week stint at the Hoover Institution.

So I was very happy to see this post by William Sjostrom at AtlanticBlog. Sjostrom alertly exposes a bait-and-switch that runs across Krugman’s two most recent columns.

I must soon be off again to the IHS seminar site – but before I go, I can’t resist making at least one small point about Krugman’s call for a national campaign to make Americans more svelte.

In yesterday’s column, Krugman wrote:

How can medical experts who see obesity as a critical problem deal with an ideological landscape tilted in the direction of doing nothing?

One answer is to focus on the financial costs of obesity, and the fact that many of these costs fall on taxpayers and on the general insurance-buying public, rather than on the obese individuals themselves.

Krugman here reminds me of the 17-year-old kid who murders his parents and then pleads for the court’s mercy on grounds that he’s an orphan.

Krugman advocates government-provided, universal health care for all Americans. That is, Krugman advocates further turning issues that would otherwise be private in to ones that are, by policy design, public. (In econospeak, Krugman advocates creating an externality where one doesn’t naturally exist.) Championing existing levels of nationalized health-care in the U.S. (mainly Medicare and Medicaid), and calling for even more, Krugman then tosses his hands in the air rather cavalierly and cites these government policies as a justification for greater intrusion into people’s private lives (or, what should be people’s private lives – and would be people’s private lives exclusively – were it not for the very health-care policies that Krugman champions).

One more point: because it’s true that government today heavily subsidizes medical treatment, might Americans have greater incentives to eat and exercise properly if this subsidization were reduced?

Ian Vasquez on Foreign "Aid"

Ian Vasquez of the Cato Institute sums up nicely the problems with foreign "aid."  Here's the core:

Why has aid performed so poorly and why should we not expect better results in the future? By the 1990s, a long-delayed consensus emerged among development experts that putting aid into poor policy environments does not work. Overall, there is no correlation between aid and growth, but in Africa aid has harmed development by supporting governments whose policies have actually impoverished people.

Even when aid is supposed to promote policy change, it fails. Countries promise reform, receive donor largess, then introduce half-hearted reforms or fail to do so altogether. A recent World Bank study looked at the record of aid from 1980 to 2000 and found "aid on balance significantly retards rather than encourages market-oriented policy reform." That finding is consistent with a previous Bank study that "reform is more likely to be preceded by a decline in aid than an increase in aid."

Immigration, Culture, and Subjective Utility

Gil Guillory at LewRockwell.com argues that I am an inconsistent subjectivist, for in a recent paean to population growth I ignore the fact that population growth – particularly if powered principally by people who are foreign to us – might change culture and language in ways that inflict significant utility losses on some people. Because of the possibility of these utility losses, we should not applaud population growth too readily, even if it does lead to long-term increases in material standards of living.  The subjective utility losses might dominate, making the cultural change on net an undesirable outcome. (This is my summary of what I understand Gil’s position to be.)

I agree with Gil that people care about culture and language. I agree also that there’s nothing intrinsically wrong with caring about such things. (I add the previous sentence because some people also genuinely care about other-people’s skin color and sexual orientation. I insist that to care about these things – to condemn or dislike someone simply because of his skin color or his sexual orientation – is uncivil and wrong.)

I agree also with Gil that it’s possible that growth of the immigrant population in America might cause the culture here to change in such a way that the consequent subjective utility losses (of those who suffer such losses) outweigh any and all subjective-utility gains created by such population growth.

But Gil’s argument proves too much. Arguing that subjective disutility of any event can swamp the subjective positive utility of that event is far too open-ended. That style of argument allows me to assert that my preference for open immigration is so very intense that any policies that stifle immigration cause me such immense utility losses that such policies should be avoided.

Pursued consistently, Gil’s argument would oblige subjectivists to withhold judgment about any policy move – as well as about the status quo.

The best we can do, policy-wise, is to follow rules that theory and experience teach us generally promote human well-being. Leaving peaceful people free to associate with whatever other peaceful people they wish to associate strikes me as one of these rules.

Yes, it’s true that following this rule might well result in Mr. X – who truly dislikes, say, dark and swarthy folk – having to endure the sight of dark and swarthy men and women walking peacefully down the sidewalk on their way to a dinner party at my home. And it’s possible that the mental torment – the subjective disutility – that Mr. X suffers on account of this experience outweighs whatever positive utility gains are enjoyed by me and my visitors.

Likewise, it’s possible that Mr. Y suffers such deep and troubling agony at the change in the English language caused by immigrants that his subjective disutility alone outweighs all subjective positive utility gains created by immigration.

But the true subjectivist is precisely the last person who jumps from such possibilities to the conclusion that on these grounds immigration should be prevented or slowed. After all, the true subjectivist knows that the positive utility enjoyed by others might well be super-large. The true subjectivist understands that it's impossible to choose among policies based directly upon their costs and benefits defined in terms of pure subjective utilities – for utility is indeed subjective and impossible to measure in the abstract.

So yes -- more immigration into America, and higher rates of fertility of immigrants, will indeed change our culture.  (Culture -- any worthy culture, like that of America -- is always changing.  American culture today isn't what it was in the 1950s and it wasn't in the 1950s what it was in the 1780s.  Immigration or no, American culture in 2040 won't be what it is in 2005.)  And this changing culture might inflict gargantuan utility losses on some people.  But so, too, might it bestow gargantuan utility gains on others.  How do we know?  How could we know?

The weary do rest

Charles McGrath in this article (rr), "No Rest for the Weary" in the NY Times Sunday Magazine, discusses how people have to work longer hours under pressure from globalization.  After talking about how much the United States envy the French for their legendary ability to relax, he says further on:

Working hours in America -- the nation in the world with by far the most efficient human engines -- have risen steadily over the last three decades.

Unfortunately for the author, this statement is simply not true, at least not generally.  Here are the numbers (from the Bureau of Labor Statistics, reported in the Economic Report of the President) for average hours worked per week for private production and non-supervisory workers in the United States:

1970   37.0
1975   36.0
1980   35.2
1985   34.9
1990   34.3
1995   34.3
2000   34.3
2003   33.7

Now it could be the case that for some groups, such as professionals, supervisors, self-employed, hours of work have risen.  And perhaps some surveys have been taken of these groups show a rise in hours worked.  But my guess is that even for this group, lifetime hours worked have been falling for two reasons, earlier retirement and less time really working on the job.  The latter point is that even when we're "working" that is, sitting at our desk, we take leisure, making airline reservations for our vacation, bidding on eBay.  (Hat tip to my colleague Larry Iannacone for this last point).

This inconvenient fact of falling rather than rising hours of work makes the logic in the Times article a bit difficult to sustain.  I have asked the author for the source for the claim that people are working more hours and he hopes to send it to me.

Immigrants Doing More than their Part

I once attended a brilliant speech by Steven Landsburg in which he suggested that one of the most plausible real-world examples of market failure in modern market economies involves child-bearing decisions.

I’m working from memory here – Landsburg’s talk was five or six years ago – but I believe that I recall his main points accurately enough. Landsburg argued that decisions to have children in market economies generally produce positive externalities. That is, the net benefits enjoyed by each set of parents of having and raising children are so low relative to the benefits that each raised-to-adulthood person bestows on society that parents have ‘too few’ children.

(Addendum: McKay Curtis kindly found for me the Slate column in which Landsburg spells out his ideas on this matter.  Here it is -- well worth a careful read.)

Landsburg’s talk was Simon-esque (as in Julian Simon). It was inspired by the insight that the free human mind is the ultimate resource.  More people in a free society mean more creativity, more discovery, more problem-solving, more effort, and a deeper and more productive division of labor. In short, more people in a free society mean more resources and higher living standards.

Yet the value that Suzy adds to this productive engine is only poorly captured by her parents. This fact is regrettable because Suzy’s parents bear almost all of the costs of raising her to responsible adulthood. The proximate result: too few Suzys and Bobbys and other people created and raised in market societies. The paramount result: too few resources created.

(Fortunately, market economies have so many other strengths that they can survive this ‘market failure.’ For this reason, among others, I emphatically reject – as I suspect Landsburg rejects – any government intervention aimed at remedying this ‘failure.’)

So I was very happy to learn from this new study released by the xenophobic Center for Immigration Studies (CIS) that immigrants to America are having lots of babies on these shores.  Indeed, immigrants are having babies in America at a higher rate than are non-immigrants in America. CIS regards these immigrant children as regrettable; I regard them as a boon.

Speaking as someone who knowingly behaves selfishly – I have only one child and plan to have no more – I offer special thanks and praise to immigrants who not only work especially hard here in America but who also are creating and rearing ‘ultimate resources’ that will benefits us all enormously when they reach adulthood.

Liberty Belle on Advertising

Bravo! to Clara at Liberty Belles for her pre-emptive exposure of what will surely be another instance of Bill Frist's hypocrisy.  (Precis: Senator Frist publicly questions the value of advertising of pharmaceutical products.  Candidate Frist will surely advertise his merits for the presidency of the executive branch of the U.S. government.)

Advertising is one of the most misunderstood (and, hence, easily ridiculed) features of market economies.  My favorite treatments of it are:

Robert B. Ekelund & David Saurman, Advertising and the Market Process (1988)

George Bittlingmayer, "Advertising".

Lee Benham, "The Effect of Advertising on the Price of Eyeglasses," Journal of Law & Economics, Vol. 15, October 1972, pp. 337-352.

Chapter 4 of Israel M. Kirzner, Competition and Entrepreneurship (1973).

Blarney

Today's New York Times contains this letter from one Mr. Peter Ebnet of St. Cloud, Minnesota.  Mr. Ebnet is distraught that Ireland is prospering.  I send him here an open letter:

Dear Mr. Ebnet:

You are "saddened" that Ireland is becoming economically prosperous. No, that’s not quite right (or fair of me): You are "saddened" because Ireland is losing its "identity" as its people cooperate ever more closely with more and more peoples from around the world in a process that improves their standards of living.

The sight of "foreign manufacturing plants" in Ireland burdens you with "oppressive melancholy." You regret that Gaelic is fading today everywhere as a spoken language, save in the western coast of Ireland – the part that remains poorest and that hasn’t yet been much affected by globalization.

You expressly hope that other countries don’t follow Ireland’s recent path, lest they lose their "identities."

Reading your letter reminds me of a conversation I had about five years ago with a friend – a dear and good friend – who just returned from her first trip to Ireland. She was disappointed because Ireland "looks a lot like America."

This American friend of mine wanted Ireland to be filled with cute little thatched-roof cottages inhabited by gentle peasant-folk tending their gardens, feeding their pigs, and looking about merrily in verdant meadows for four-leafed shamrocks. My American friend was appalled that the Irish share her taste for material wealth – for houses with solid roofs – for modern appliances – for automobiles and broad, smoothly paved roads – for shopping centers, airports, fusion-cuisine restaurants, and all the other blessings of a worldwide market.

Of course, my American friend didn’t quite see herself in this way. She simply didn’t see or think. To her – a middle-class American woman for whom material wealth is the norm – the expected opportunity to gaze first-hand upon simple peasants going about their peasant-ways in their peasant-clothes in their peasant-settings was almost something of a right. "How dare they not be as I expect them to be!" was her unsaid theme. "How dare they enjoy similar things to those that I enjoy!  How dare their country look like mine!  This unexpected set of affairs makes my vacation to Ireland less pleasant."

In other words, this friend of mine – like you, Mr. Ebnet – selfishly wants other people to be museum pieces for her enjoyment. You and she dislike signs of material progress in Ireland because you live in the United States, with ready access to an abundance of material wealth that the Irish are just now beginning to enjoy themselves.

You blithely wish that the Irish had remained poor so that you would have continued, during your visits from America, to luxuriate in their quaint languages and enjoy gazing upon Ireland’s natural vistas unaffected by advanced commerce.

And you want other peoples to reject the wealth that the Irish (and Americans) now enjoy so that they retain their "identities" – identities as poor, peasant-dominated societies.

Why should other people want to make these sacrifices for you, Mr. Ebnet? Are you willing to make like sacrifices for them? Are you, for example, willing to go off to live in the Minnesota woods in an unheated log cabin with no running water or electricity? No car? No supermarkets? After all, I’m sure that visitors to America would really appreciate gazing upon a true American pioneer, living just the way our great-great-grandparents lived.

If you’re not willing to take this step, Mr. Ebnet, please tell me why you expect the Irish and other peoples in places less affluent than the U.S. to do so? Or, at least, please explain why your selfish desires about how Ireland and other countries should look and sound deserve a hearing given that the people who live in these places obviously want more material prosperity.

Sincerely,

Don Boudreaux (whose grandmothers were born Teresa Flanagan and Estella Ryan)

The Importance of Population

Dr. R. T. Ravenholt was Director of USAID’s Population Program from 1966 to 1979. His letter in today’s New York Times gives some hint about why foreign "aid" programs have been so unsuccessful.

Dr. Ravenholt wants more emphasis on birth-control for Africans. Here’s his punchline:

Resources divided by the population equals the human condition.

Dr. Ravenholt believes that there’s a fixed amount of stuff (and stuff to make stuff) to go around. This view, of course, is widespread. If it were true, Dr. Ravenholt would be correct that fewer people would mean more material wealth. Birth control would then be key to economic prosperity.

But Dr. Ravenholt’s belief is mistaken. Evidence against this belief is under our noses. Compare Manhattan to Mississippi.

Probably the richest 23 contiguous square miles on the planet is Manhattan. It is also a speck of earth that is among the worlds most densely populated, with each square mile, on average, packed with 67,000 residents. More than 1.54 million people live on Manhattan and some 2.12 million people work there all amidst the millions of visitors who flock to that island every year.

According to conventional belief, Manhattanites should be among the earths most destitute and wretched peoples. Yet despite the fact that Manhattan has no forests, farms, pastures, fisheries, or mines, per-capita income there is a sky-high $73,000.

Compare Manhattan to the 46,907 square miles that are Mississippi, a state boasting a great deal of fertile farm land, bountiful lakes and rivers, and thick forests. Mississippi is also blessed (if conventional belief is valid) with a human-population density less than 1/1000th that of Manhattan (61 Mississippians per square mile compared to 67,000 Manhattanites per square mile). According to conventional belief, Mississippians should be much wealthier than Manhattanites. But instead they’re much poorer. Per-capita income in Mississippi is less than $16,000, a mere 22 percent of that of Manhattan.

After I first published these paragraphs (in this essay) in November 2003, I received a good deal of e-mail informing me that my comparison is invalid – the chief complaint boiling down to "you simply can’t compare Manhattan to Mississippi."

Why not? If those (like Dr. Ravenholt) who believe that "resources divided by the population equals the human condition" are correct, then why are Manhattanites so much more materially wealthy than Mississippians?  Why should such an obvious and central truth not be in evidence when looking at Manhattan compared to Mississippi?

I asked this question to all my correspondents. The reply to my question was, in effect, "other things are happening to create this difference in material wealth."

No doubt ‘other things’ explain the wealth difference between Mississippians and Manhattanites. But an overlooked factor is not found elsewhere; it’s found smack-dab in the population numbers themselves. Manhattan is a rich place in large part because it’s densely populated with a lot of free people.

People create wealth. Julian Simon’s lesson cannot be repeated too often: free human beings are the ultimate resource.

When people are reasonably free, it's more correct to say that "resources times population equals the human condition."

A Lesson from 16th-Century Spain?

Does Spain`s history contain lessons for those who see more foreign aid to Africa as key to Africa`s escape from poverty?

Maybe.

Consider this passage from page 275 of Will and Ariel Durant`s The Age of Reason Begins (1961):

The expulsion of the Jews in 1492 had left a vaccum in the commercial and financial structure of Spain.  The Genoese and the Dutch became the chief carriers of Spain`s foreign trade.  Spain, governed by grandees more adept in diplomacy and war than in economic affairs, allowed her wealth to depend upon the import of gold; for a time the government grew richer while the people remained poor; but much of the gold was poured out for war, much of it was taken by foreign merchants carrying Spain`s trade, until the government was almost as poor as the people.  Spain repeatedly repudiated its debts (1557, 1575, 1596, 1607, 1627, 1647) or compelled their conversion into new loans.

If much of Spain`s gold had also been transferred by her 16th- and 17th-century grandees to Swiss bank accounts, the history lesson would be even fuller.

Debt relief certainly didn`t work for Spain.

Prosperity is goods and services to consume; not money -- not even `resources,`for resources must be transformed into desirable goods and services.  And transforming resources into desirable goods and services requires productive creativity and productive effort.  These, in turn, are unleashed (and properly channeled) only by a system of secure and exchangable private property rights defined and enforced under a strong rule of law.  (And a strong rule of law is not necessarily the product of strong government.)