Cafe Hayek

On America's Middle Class

In two of his Forbes columns, NYU's Thomas Cooley challenges - with data - the widespread misunderstanding that America's middle-class is disappearing.  Here, and then here.

(HT Greg Mankiw)  The Terry Fitzgerald work that Cooley mentions was mentioned here at the Cafe a while back.

I raise, though, one objection to Cooley's otherwise excellent columns.  In the first one linked to above, he credits technological change for the explosive economic growth of the 1980s and 1990s.  I don't accept technology as an explanation.  A rush of technology has causes; it must be explained.  Technology is not a variable exogenous to economic growth.

Treason Against Reason

John Stossel challenges Paul Krugman's over-the-top assertion that oppostion to climate-change legislation is "treason against the planet.

I also challenge Krugman in a different, but complementary, way.

George Will on Green Jobs

George Will is always worth reading.

Some Unlucky Numbers for Opponents of Proposition 13

According to now-conventional wisdom, one of California's big problems is Proposition 13.  Passed in 1978, this Proposition strictly limits increases in property taxes in California - a restriction that those who are Conventionally Wise assert fuels California's fiscal problems.  For example, here's Harold Meyerson writing last month in the Washington Post:

To understand why the woes of California's economy threaten the nation's, we must understand the state's road to insolvency. The Age of Reagan did not commence with the Great Communicator's inauguration in 1981. For its real beginning, we need to go back to June 1978, when Californians went to the polls and enacted Proposition 13.

By passing Howard Jarvis's malign initiative, California voters reduced the Golden State to baser metal.

Well, turns out that Proposition 13 is an unlikely culprit, as Paul Jacob argues here.

The percentage increase in property-tax revenue reported in the article that Jacob links to is overstated, as the dollar figures from which it is calculated appear to be nominal rather than real (that is, these numbers do not appear to be adjusted for inflation).  Still, adjusting for inflation, although it changes the magnitude, does not change the conclusion.  In real dollars, property-tax revenue in California (between 1980 and 2007) rose by 170 percent (compared to a 58 percent increase in that state's population over the same time period).
....
A fuller post on this topic would examine also what happened over these years to other sources of revenue for government in California - especially to revenue from the Golden State's income tax.  But I'm too busy now to explore this question.  (I would be surprised if these other sources of revenue did not also rise, in real terms, so that the total take of revenue by government in California is now higher today than it was 30 years ago.)

The Economic Case for Tax Cuts

Here's a letter that I sent on Sunday to the New York Times:

You write as though the only reason to cut taxes is to promote more consumer demand ("The Sorry State of the States," May 24).  You're mistaken.

By far, the chief economic reason for cutting taxes is to increase the return to productive activity - to increase the return to investment, to risk-taking, to creativity, to work.  The economic justification for lower taxes rests squarely on the understanding that cutting marginal tax rates makes profitable many productive efforts, including hiring more workers, that are unprofitable at higher tax rates.

Why does this straightforward point seem so taxing to your editorial-writers' comprehension?

Sincerely,
Donald J. Boudreaux

Following the money

Here are two totally intuitive common sense arguments:

"Buying local is better than buying from a chain store—the money stays in the community."

"New products only benefit the inventor—the money he receives necessarily reduces the money available to other producers."

Both are intuitive and common-sense. Both are wrong. Both illustrate an additional fallacy—that economics is "just common sense." The fallacy in the two statements is the equating of money with prosperity. They are not the same. What we care about isn't the number of green pieces of paper with pictures of dead statesmen on them. It's what the pieces of paper buy. The fallacy is to see voluntary exchange as necessarily zero-sum. It is not. It is positive-sum. Understanding this is perhaps the single most important and basic lesson of economics. It is also one of the hardest to learn.

Political Dreams Don't Trump Political Reality

The prolific and always-insightful Andy Morriss -- who co-blogs with me at Market Correction -- sent this letter several days ago to the Wall Street Journal:

Sirs,

In “A Government Safety Net is Not Enough,” Marc Morial and Janet Murguia begin by repeating the canard that “FDR’s New Deal helped lift the country out of the Great Depression.” (April 29). This has been debunked repeatedly, including in reviews in your own paper of Amity Shlaes’ The Forgotten Man. Not content to rewrite history, the two authors next assert that the stimulus bill was enacted “to boost economic growth.” Your own paper has documented that (a) neither the vast majority of Congress nor the Administration had any idea of what was in the massive stimulus bill, making their intentions irrelevant and (b) it was a special interest feeding frenzy, redistributing wealth from our children to those whose lobbyists managed to claim them a share. When I want to read historical fiction, I head for the library. When I want to read contemporary political fantasies, the New York Times is readily available. I appreciate the Journal’s commitment to a diverse set of view points, but it would be better served by limiting contributions to those that reflect a clearer understanding of history and politics.

Andrew P. Morriss

H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois

Costs Are Not Benefits

Here's a letter that I sent yesterday to the New York Times:

Paul Krugman makes the astonishing claim that "a commitment to greenhouse gas reduction would, in the short-to-medium run, have the same economic effects as a major technological innovation: It would give businesses a reason to invest in new equipment and facilities even in the face of excess capacity" ("An Affordable Salvation," May 1).

Technological innovations benefit society not by giving firms "a reason to invest in new equipment and facilities," but by reducing costs - not by making resources scarcer (by artificially increasing demands for them) but by making resources go farther in their capacity to satisfy human desires.

If "a reason to invest" were sufficient to restore economic vigor, then war and natural disasters would do the trick even better than would government restrictions on greenhouse-gas emissions.

Sincerely,
Donald J. Boudreaux

Hocus-Pocus Indeed

Here's a letter that I sent recently to the Washington Post:

No one can doubt the goodness of E.J. Dionne's motives, but his unshakable faith that well-intentioned and intelligent politicians will make America better is adolescent.  The naive confidence that he has in Barack Obama - as revealed in Mr. Dionne's suggestion that the President "is smart enough to fix things" ("Ironies of 'a Devout Non-Ideologue'," April 27) - reminds me of a line from George Eliot's Middlemarch: "You go against rottenness, and there is nothing more thoroughly rotten than making people believe that society can be cured by a political hocus-pocus."*

Sincerely,
Donald J. Boudreaux

* George Eliot, Middlemarch (Oxford Library Classics, 1996 [1871]), p. 517.

Cardboard Characters

President Chavez gave a book to President Obama.  As Mary O'Grady explains in this article, Senor Chavez's reading list speaks volumes about his world view -- a benighted view in which prosperous nations are seen to grow rich by "exploiting" poor nations -- a fatuous view that sees events as being only struggles by good guys against bad guys -- a tunneled view focused not on understanding reality but one that reveals to the viewer only that which enables the viewer to feel morally certain and superior (while, at the same time, saving the viewer any need to do real, serious thinking).

Persons with this world view find compelling the cardboard characters that inhabit books such as those admired by Senor Chavez.

Foolishness on Film (Or, Wiping the Sheen Off of Silliness)

Tyler Cowen hits a home run with his review of Phillipe Diaz's movie The End of Poverty.  Here's one especially nice selection:

I can only report that The End of Poverty, narrated throughout by Martin Sheen, puts Ayn Rand back on the map as an accurate and indeed insightful cultural commentator. If you were to take the most overdone and most caricatured cocktail-party scenes from Atlas Shrugged, if you were to put the content of Rand’s “whiners” on the screen, mixed in with at least halfway competent production values, you would get something resembling The End of Poverty. If you ever thought that Rand’s nemeses were pure caricature, this film will show you that they are not (if the stalking presence of Naomi Klein has not already done so). If you are looking to benchmark this judgment, consider this: I would not say anything similar even about the movies of Michael Moore.

In this movie, the causes of poverty are oppression and oppression alone. There is no recognition that poverty is the natural or default state of mankind and that a special set of conditions must come together for wealth to be produced. There is no discussion of what this formula for wealth might be. There is no recognition that the wealth of the West lies upon any foundations other than those of theft, exploitation and the oppression of literal or virtual colonies.

Or as I recall Peter Bauer's way of putting the matter: "poverty has no causes; wealth has causes."

The State of Manufacturing in the United States

This is a pretty darn good report from Harold Sirkin at Business Week.  A key paragraph:

As Stephen Manning of the Associated Press acknowledged in a rare "just the facts" story in mid-February, the U.S. "by far remains the world's leading manufacturer," producing goods valued at a record $1.6 trillion in 2007 — nearly double the $811 billion produced a decade earlier. Indeed, the AP writer noted, "For every $1 of value produced in China's factories [in 2007], America generated $2.50." Not bad for a country that doesn't produce anything anymore.

The facts contradict those who insist that freer trade condemns high-wage countries, such as the United States, to suffer net losses of highly productive enterprises.  (More such facts on manufacturing in the U.S. can be found here.)

(HT Walter Peterson)

Rizzo vs. DeLong

Mario Rizzo, over at ThinkMarkets, explains well the difference between economists who understand that the modeling tractability made possible by thinking in terms of aggregates (such as "aggregate demand") is not worth the price of losing focus on the necessity of countless resources being arranged and re-arranged in very specific ways - not worth the price, that is, if the goal is sustained and widespread prosperity.  The micro-foundations are all-important.

Mario's post is among the best that I've ever read on this topic.  Read it.  Re-read it.  Re-re-read it.  (And read the comments, too.)  Here's the heart of Mario's post:

So when [Brad] DeLong, among others, says that government spending is as good as private in restoring employment, he is speaking against the whole thrust of the principle of efficient resource allocation. The essence of our recessionary problem is not the fall in aggregate demand and the lack of business confidence that accompanies it. First, it is the misallocation of resources produced by excessive risk-taking and by excessive expansion of interest-sensitive sectors. (These were generated by excessively low interest rates over the past several years.) Second, it is the uncertainty that is natural to the discovery of more appropriate combinations of resources. Third, it is the endogenous uncertainty created by the fits and starts of stimulus, bailout and unclear monetary policies.

When government adds to investment as a result of fiscal stimulus or directed monetary expansion (like buying mortgage-backed securities, student loans, etc) it does not act as a super-entrepreneur who is trying to determine the efficient and sustainable direction of resources, including the allocation of capital goods. It spends according to economically irrelevant criteria of job creation, propping up over-expanded sectors, and preventing politically painful adjustments.

Such spending is counterproductive in the medium to long term. It is also unsustainable (once the stimulus stops) since it is not consistent with the preferences of consumers-savers-investors.

Green Jobs Myths

"Green jobs" promise a black-and-blue future.

I'm Not A Member of this Religion

Here's a letter that I sent yesterday to the Wall Street Journal:

Paul Singer's case for more government regulation of financial markets has at least two flaws ("Free-Marketeers Should Welcome Some Regulation," April 3).

First, Mr. Singer ignores the possibility that errors made in the private sector - such as balance sheets leveraged too highly - were artifacts, not of too little government intervention, but of too much.  Double taxation of profits combined with deductibility of interest on debt; implicit government backing of Fannie and Freddie; and (most significantly) the Fed's monopoly control over the money supply, are just some government policies that might have promoted the great bulk of the private-sector errors that Mr. Singer laments.

Second, even if today's problems are at root the fault of the market, Mr. Singer writes as if he's proposing new regulations to an apolitical and unbiased agency, one immune to interest-group pressures and to the weaknesses in human judgment that Mr. Singer himself believes contributed to the market's implosion.  I dare say that no error in judgment is so dangerous as the one that leads Mr. Singer and others to regard government as being something akin to a god-like institution.

Sincerely,
Donald J. Boudreaux

More on Aggregate Demand and Micro-level Coordination

Earlier this week, Paul Krugman claimed that the current stimulus plan is "too small and too cautious."  And, as I mentioned, my colleague Tom Hazlett (and his co-author George Bittlingmayer) offered empirical evidence against Krugman's claim.

I weighed in, taking another angle, with this letter to the New York Times:

To the Editor:

Paul Krugman insists that the current stimulus plan will fail because it is too small ("Behind the Curve," March 9).  We non-Keynesian economists also believe that it will fail, but for very different reasons: the chief problem is less one of deficient aggregate demand than it is one of poor coordination of the plans of producers with the (non-bubblicious) demands of consumers.

Economic prosperity requires that workers whose jobs were created by the bubble be redeployed into jobs that are viable.  Stimulus spending does nothing to promote this greater coordination of economic activities - and, by promising higher taxes or higher inflation in the future, likely interferes with the economy's capacity to coordinate.

Sincerely,
Donald J. Boudreaux

Any deficiency in aggregate demand is more a statistical consequence of failed economic coordination (at the micro level) than it is a foundational cause of economic malaise.

There's no doubt that failures to coordinate in any individual market can cause consumer demands in that, and in other, markets to be lower than they would be were coordination more complete.  But, again, first, the problem is not one of deficient aggregage demand, and second, any deficiencies of demand are more a consequence than a cause of economic woes; to the extent that these deficient demands in each market further contribute to economic downturns, they are a secondary problem -- not the fundamental one.

As I recall my professor Roger Garrison pointing out many years ago, at the very least, Keynes's 1936 book should have been titled A Special and Secondarily Important Theory of Employment, Interest, and Money -- rather than The General Theory of the same.

Who Pitches In?

Here's a letter that I sent recently to the Washington Post:

Dear Editor:

Supporting Pres. Obama's efforts to "redistribute" incomes, E.J. Dionne quotes an administration official: "'Over the past two or three decades, the top 1 percent of Americans have experienced a dramatic increase from 10 percent to more than 20 percent in the share of national income that's accruing to them,' said Peter Orszag, Obama's budget director.  Now, he said, was their time 'to pitch in a bit more'" ("The Re-Redistributor," March 2).

This "Progressive" mindset poisons sound thinking.

First, in market economies incomes aren't "distributed"; they're produced and earned.  Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; the fact that someone's income rises means that he or she already is pitching in more.  Third, the share of federal individual income-tax revenues paid by America's top one-percent of income earners has recently been on the rise.  In 2006 (the latest year for which data are available) this tiny group of Americans paid a whopping - and all-time high - 39.9 percent of such taxes.

Sincerely,
Donald J. Boudreaux

Build that Dam Using Only Spoons!

Here's a letter that I sent today to the Boston Globe.  In it, I try (however feebly) to undermine the absurd notion that the economic worth of any project is measured by the number of jobs required to complete it.

Dear Editor:

Derrick Z. Jackson reasons that among mass transit's benefits is the fact that, dollar for dollar, its provision requires more workers than do investments in the auto, oil, coal, and gas industries ("The transformation of transportation," Feb. 24).  Mr. Jackson's reasoning is flawed.

 

The number of workers required to supply a good or service is not a benefit of that good or service; it's a cost. Societies become more prosperous only as they succeed in using fewer workers and other inputs to supply any given amount of output. Only then are inputs made available to produce outputs that otherwise could not be produced.

 

If Mr. Jackson were correct that a project's benefits rise with the number of jobs it creates, then an even better system of public transportation would be rickshaws, for they require one worker for every passenger-ride.

 

Sincerely,

Donald J. Boudreaux

Jim Crow Was a Product of Government

Here's an important history -- and economics -- lesson from the Boston Globe's Jeff Jacoby.  His conclusion is this:

Many Americans know that it took strong government action in the 1950s and 1960s to end Southern segregation. Far too few realize that it was government action that established segregation in the first place. Today, when the power of the state is being aggrandized as never before, the history of Jim Crow offers a cautionary reminder: When the political class overrides the private sector, what ensues can be a national disgrace.

Deficient Economic Thinking

Here's a letter that I sent yesterday to the Wall Street Journal:

Peter Morici asserts that America's trade deficit with China causes "a huge drain on the demand for U.S.-made goods and services. The absence of reciprocal free trade is an important reason the U.S. economy is in its current mess," (Letters, Feb. 11). Untrue. Dollars the Chinese do not spend on U.S.-made goods and services are invested in dollar-denominated assets. These investments raise demand for U.S. output just as would more direct expenditures on goods and services. Consider what happens, for example, if the Chinese buy shares of Microsoft, thus raising America's trade deficit with China. First, the American sellers of these shares get more dollars to spend on U.S.-made goods and services. It's economically irrelevant if the persons buying these outputs are from Seattle or from Shanghai. Second, Microsoft's cost of capital falls, making that company more likely to expand operations, or at least less likely to contract them. Concerns about the U.S. trade deficit are unwarranted.

How Bad Is this Economic Downturn?

I wonder why so many self-described citizens of the "reality-based community" -- generally, the "progressive" left -- remain so stubbornly blind to the reality of the current downturn, as explained today by Alan Reynolds.  Here's a sample paragraph:

With one exception - the steep 45 percent drop in the S&P 500 stock index since October 2007 - few other indicators of economic distress could support this being the worst postwar recession. Thanks to low inflation, for example, real disposable income rose every month during the fourth quarter - at an annual rate above 6 percent.

Temporary Slavery Called "Service" Is Still Temporary Slavery

Here's a letter of mine appearing in today's Baltimore Sun:

Dan Rodricks wants to promote "national service," and he believes that the nation's current infatuation with President Barack Obama provides an ideal opportunity to implement such a program.

Let's put aside the mistaken premise that each of us "serves" only when we work in government programs and ask this question: How will Uncle Sam know how best to use all the conscripted labor at his disposal?

And what earthly reason is there to suppose that he will deploy such labor according to reasonably objective criteria rather than according to political fads, partisan emotions and interest-group influences?

Sadly, Mr. Rodricks utterly ignores practical questions such as these. His essay is evidence of the truth of what Thomas Sowell observes in a recent column: "Politics is about evoking emotions, not examining specifics."

Donald J. Boudreaux Fairfax, Va.

The writer is chairman of the Department of Economics at George Mason University.

The letter immediately following mine is better:

Dan Rodricks' column "Americans poised to heed Obama's call to service" advocates national service. He favors not just voluntary service but paid service - that is, a government jobs program in which bureaucrats decide how to spend even more of our tax dollars.

That's bad enough. But then Mr. Rodricks goes the extra step and suggests that the national service program should be mandatory.

Forced labor is slavery, whether the slaves are paid with room and board or with money.

Let's not pretend mandatory national service is anything but a sanitized form of slavery.

It's a shameful idea in a country that's supposed to stand for freedom.

David Page Baltimore

Lose the 'We'

Beware double-counting.

What's Fair?

My former GMU colleague (now at Chapman University) Bart Wilson has this very nice essay, at The Atlantic's "Brave New Deal," on fairness.  I hope that Bart's essay gets wide readership.

(HT Candace Smith)

Costless?

"It will cost taxpayers nothing!"  Riiiggghht.

Credit Is Too Tight, Except When It's Too Loose

Below (and here) is a letter that I sent this morning to the Washington Post.  Can anyone tell me why more people don't pick up on this obvious inconsistency?

Treasury Secretary nominee Timothy Geithner sides with those who worry, as you put it, that "Beijing has kept its currency artificially low to keep the prices of its goods cheap and generate trade surpluses. That has led to a global capital imbalance, as American consumers borrowed and spent and China became the United States' largest foreign creditor" ("Geithner Says China Manipulates Its Currency," January 23).  And he threatens to act "aggressively" to stop this alleged wrongdoing.

Overlook the reality that the only way Beijing can push the price of the yuan lower is through inflation or other policies that weaken the Chinese economy.  Instead ask: why should the Obama administration be so upset by Beijing pumping easy credit into markets at a time when this same administration is deeply worried that credit has become too tight?

Sincerely,
Donald J. Boudreaux

Reflections on the Election of Obama

Here are the insightful thoughts of sociologist Anne Wortham on the election of Barack Obama.  This was published just after the election, but I discovered it only now (thanks to Dave Rose).

Today's Economy in Perspective

Steve Chapman helps put the state of today's economy in historical perspective.  Summary: it ain't great, but it's hardly the once-in-a-lifetime catastrophe that conventional wisdom has already declared it to be.  (Of course, it could become such a catastrophe if Uncle Sam continues his frenzied interventions.)

Tranquilizing the Stimulators

The Competitive Enterprise Institute's Ryan Young and Drew Tidwell understand that there ain't no such thing as a free stimulus.  Here's a great letter by Ryan and Drew in the current issue of Time.  (You can find their letter on line by clicking here and scrolling down a bit.)  Oh, by the way: Ryan is working toward a graduate degree in Economics at GMU.

Kinsley's latest missive in time falls prey to one of the oldest traps in economics--Frédéric Bastiat's broken-window fallacy. Just as a broken window creates work for the glazier at the expense of the window owner, money that Kinsley hopes to inject into the economy must first be taken out of it. Add in collection costs and the usual political malfeasance, and we have a net loss to the economy. There's more: Kinsley argues that last summer's high oil prices were essentially a tax on consumers; the money just went to oil companies instead of the government. But he forgets that oil companies do not have control over their prices. If they did, then why would oil prices ever drop? Kinsley's logic does not follow.

Ryan Young and Drew Tidwell, Competitive Enterprise Institute, WASHINGTON

Easterly on Hayek

Today's Dean of development economists, William Easterly, won the inaugural Hayek Prize, offered by the Manhattan Institute, for his splendid book The White Man's Burden.  Congratulations Bill!

Here's the Hayek Lecture that Bill delivered this past October when he was awarded the prize formally.  Like all of Bill's work, it is written in a lively, engaging, fast-flowing style, filled with humor and important facts and insights.  I whet your appetite with the opening paragraph:

Tonight we find ourselves in a moment similar to that in which Hayek wrote The Road to Serfdom in 1943. Then, as now, a great financial crash was seen as a failure of freedom. Actually, things were even worse then for Hayek’s point of view. In the aftermath of the Depression, many pointed out the apparent success of centrally planned industrialization in the Soviet Union in outperforming markets. As Hayek wrote in 1943, democracy barely existed outside of a few English-speaking societies. Even in the U.S., people noted the apparent success of government top-down planning for wartime production of arms. Under these circumstances, Hayek knew he would be caricatured as a right-wing ideologue, even though his ideas did not fit into the stale partisan debate about markets versus government. He argued that the best system in the long run relied upon the creativity of individuals at the bottom who had both political and economic freedom. In a way I will describe below, Hayek saw both government and markets as functioning better the more they were the outcome of spontaneous development from the bottom up, with nobody in charge. It took courage to criticize top-down control after the scary calamities of the Depression, yet Hayek’s vision would be vindicated by subsequent events. How many of us will show similar intellectual courage in the midst of today’s financial crash?

Political Theater

Here's a letter of mine appearing in today's Washington Times:

I agree with every sentence of Steve Chapman's essay on Barack Obama save this one: "But Mr. Obama came to public attention because of a speech, at the 2004 Democratic convention, that showed he was capable not only of a clear thought but of genuine passion" ("a 'My Pet goat moment," Commentary, Wednesday).

The most we can conclude from that speech is that Mr. Obama is capable of displaying passion that appears genuine to audiences longing to hear it, much like a soap-opera star is capable of displaying passion for an actress whom that star might hold in utter contempt the moment the tape stops rolling.

Let's not confuse theater with reality.

DONALD J. BOUDREAUX
Chairman
Economics Department
George Mason University
Fairfax

Keynesianism?

In this entertaining video, Dan Mitchell of the Cato Institute intelligently challenges Keynesianism.

The Nation Is Not a House

I argue here that those who analogize a nation to a house thereby suffer distorted reasoning about immigration.

Bankrupt Assertion

Here's my latest on the nutty idea of a government bailout of GM, Ford, and Chrysler.

Too Big to Fail?

In this op-ed in today's Wall Street Journal, I argue against the bailout of GM, Ford, and Chrysler.  Here are some key paragraphs:

Bankruptcy doesn't make assets -- such as factories, machines, contractual options to buy raw materials, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then -- especially then -- the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

Invisible Hook

My GMU colleague Pete Leeson's new book -- The Invisible Hook: The Hidden Economics of Pirates -- is now available at Amazon.com for pre-order.  (Sorry; no pirated page proofs are available.  So buy the book!)

No New New Deal

Here's George Will, in today's Washington Post, speaking great good sense about the alleged need for a new New Deal.  (Will quotes Russ, and mentions Amity Shlaes's important book The Forgotten Man; unfortunately, although he hints at Bob Higgs's work, he doesn't mention Bob by name or Bob's great book Depression, War, and Cold War.)

Relative Price Adjustments and Aggregate Demand

Some persons understand the role of relative prices -- understand that prices work only if they are permitted to adjust in order to reflect relative scarcities -- understand that the hardships that sometimes accompany such adjustments are the necessary price to pay for the fact that persons yesterday got the once-good jobs and built the once-good businesses that are so painful to lose today.

Other persons, upon encountering an unusually large number of price adjustments occurring simultaneously, worry that catastrophe looms.  To avoid this awful outcome, they demand more demand.  They demand either more money be injected into the economy, or more direct spending by government.  The idea is to raise demands across the board to levels that will make the old prices -- the pre-adjustment prices -- work as they worked before the underlying reality changed.

"If only people spent as much as they spent before, all would be well," these demand-more-demand people imagine.

One of the many blind spots in this view is that it causes its adherents to overlook the underlying changes in reality that sparked the price-adjustments in the first place.  It's dangerous business to ignore this reality by trying to recreate, as a kind of facade, the economic outcomes that prevailed before the underlying reality changes.  It's ultimately futile as a means of restoring vigor to a market economy.

Amity Shlaes in today's Wall Street Journal does a great job explaining some faulty reasoning of those who insist that the problem with economic downturns is inadequate aggregate demand.

Cowen on the Great Depression and New Deal

Here's Tyler Cowen, writing in the New York Times, helping to set the record straight about the Great Depression and the New Deal.

Keynesian Stimulus, the 1930s, and WWII

The acclaimed economic historian Price Fishback has this very useful discussion, at Freakonomics, on the extent to which Keynesian stimulus played a role in helping the economy during the 1930s and during World War II.

(HT Bob Higgs)

Misunderstanding Understanding

Being 'involved' politically does not mean that the 'involved' have much, if any, understanding of the issues at stake.

More Tibor Machan

Here's a letter, with an important point, appearing a few weeks ago in the New York Times:

To the Editor:

Margaret Atwood is a fine novelist but a poor moralist. The common good she speaks of cannot be promoted literally since such a good is impossible to know, if it exists at all other than as an utterly general idea. The ''we'' that one can care about is a small number of intimates, whom one knows and can effectively benefit.

The American founders had the best idea of the common good: securing the rights of all to life, liberty and pursuit of happiness. This is a common good that avoids meddling in the lives of people one doesn't know, leaving them to do the best for themselves, their families and their friends, instead of aiming for a utopian, impossible and futile ideal.

Tibor R. Machan
Silverado, Calif., Oct. 22, 2008

The writer is a professor at the Argyros School of Business and Ethics at Chapman University and a research fellow at the Hoover Institution.

Too Big to Fail?

Popular sentiment has it backward: the bigger the unproductive firm, the more vital it is to let it fail.

Libido for Power

Challenging the myth that society would be improved if governed by "intellectuals," Thomas Sowell -- writing in today's Washington Times -- says that "It would be no feat to fill a big book with all the things on which intellectuals were grossly mistaken, just in the 20th century."

Such a book has already been filled.  Paul Hollander's "Political Pilgrims" documents the gullibility, the boundless capacity for self-delusion, and the ecstatic fetish for Great Leaders displayed throughout the 20th century by large numbers of American and European intellectuals.  These Smart People cheered the Soviet Union, applauded Mao, drooled over Castro, celebrated the Sandinistas - all the while dismissing those persons suspicious of centralized power as "anti-intellectual."

Of course, consistently these "anti-intellectuals" were proven right as the heroes of the "intellectuals" were revealed to be blood-thirsty bastards.  Is there reason to suppose that the "intellectuals'" still-raging libido for Great Leaders and Big Plans is today any more rational than it was during the tragic episodes documented by Hollander?

Taxes Haven't Been Cut Enough

Here's a letter I sent back in August to the Washington Post:

Dear Editor:

In "McCain's Problem Isn't His Tactics. It's GOP Ideas." (August 3), Greg Anrig portrays the past 30 years as a period of radically shrinking government and galloping laissez faire. Gee. Methinks he mistakes Ronald Reagan's rhetoric for reality.

In inflation-adjusted dollars, Uncle Sam's budget is now 110 percent larger than it was in 1980, the year of Reagan’s election. U.S. population since 1980 grew by only 33 percent. Although some useful deregulation has occurred during this time, the problem is hardly a retreat of government; it is, rather, government's continued insidious intrusion into ever more aspects of our lives - and, despite cuts in marginal tax rates, its continued growth. As Milton Friedman wisely pointed out, "If you cut taxes and revenues go up, you haven't cut taxes enough."

Revenues have gone up.  So tax cuts have been inadequate.

Sincerely,
Donald J. Boudreaux

On Peter Morici On the Trade Deficit

I take issue here with Peter Morici's understanding of the trade deficit.

No Saviors

The cover of the current (November 17th) issue of The New Yorker shows the "O" in "New Yorker" as an Obama "O", rising like a glowing, beneficent moon into a peaceful night sky whose only other sources of light are stars and a magnificently lit Lincoln Memorial.

It's a beautiful picture.  It's also terrifying.

To portray any human being in a way that even hints that he or she possesses special powers -- that he or she is anointed by celestial forces -- that he or she reigns in some grander-than-human way over the rest of us -- is an atavistic reflex, one that modern humanity should have (but, alas, has not) progressed beyond.

This cover, in its horrifying beauty, recalls to mind some sage advice from H.L. Mencken:

The Democratic tendency to make gods of successful politicians makes it all the more necessary to oppose them vigorously.

(This quotation is from page 174 of the 1996 Johns Hopkins University Press edition of H.L. Mencken's 1956 collection entitled Minority Report.  This book, along with all the rest of Mencken's works, are indispensable parts of my library.)

Cowen on the End of the Great Depression

Here's Tyler Cowen over at Marginal Revolution on the end of the Great Depression.

No More Bailouts

Over in The Wonk Room, Pat Garofalo argues that "If It Happens, The Auto Industry Bailout Needs To Be Done Right."  While it's true that some ways of bailing out this industry would be less harmful than other ways, there is absolutely no "right" way to do it.  To advise government to do the auto industry bailout "right" makes as much sense as advising a burglar to burgle the neighborhood houses "right."

And, unfortunately, Garofalo himself advocates a condition of the bailout that would make it worse than it would be if Uncle Sam simply gave $50 billion to GM, Ford, and Chrysler.  He wants the money to come along with a government mandate:

More importantly though - as Pelosi and Reid said - “federal aid should come with ’strong conditions,’ such as requirements that car makers build more fuel-efficient vehicles.” Bill Scher at OurFuture writes, “With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”

Producers should serve consumers who express their demands in the market -- consumers spending their own money in settings in which each individual's choice is decisive.  Danger lurks in policies mandating that producers serve politically voguish ideas masquerading as taxpayers' interests.

I'm no fan of carbon taxes or of the inherently vague notion of "energy independence," but if Uncle Sam is so terribly worried about carbon emissions from automobiles and Americans' purchase of oil from other countries, then the best way he can deal with those concerns is to raise gasoline taxes.  Auto producers and consumers would then experiment and respond with different ways and find those ways (note the plural) that best suit as many consumers as possible.  Mandating greater fuel-efficiency sounds progressive, but it's dumb and dangerous.

Henry Morgenthau on the Success of the New Deal

Even Franklin Roosevelt's own Treasury Secretary, Henry Morgenthau, admitted in 1939 that New Deal policies had not ended the Great Depression.