Cafe Hayek

Quixotic

Here's a letter that I sent recently to the Los Angeles Times:

You want to "Keep the politics out of UC" (Editorial, June 22).  Impossible, as the UC system is a government entity.  And a government entity free of politics is, as my colleague Russ Roberts says, quite as unthinkable as is a ham sandwich free of pork.

Sincerely,
Donald J. Boudreaux

Unintendend Consequences

Division of Labour's Art Carden hits a home-run with this letter in today's Wall Street Journal:

The problems identified in the article about organized gangs smuggling undocumented immigrants across the U.S. border and then holding them for ransom ("Immigrants Become Hostages as Gangs Prey on Mexicans," page one, June 10) were created by a perfect storm of government intervention. The drug war has encouraged the development of international criminal syndicates and turned parts of the U.S.-Mexico border into actual war zones.

The war on undocumented immigrants has created opportunities for those syndicates to enter into the human-trafficking business. Cheap money and government policies aimed at increasing access to "affordable housing" created the housing bubble, and further intervention in the last year prevented housing prices from falling far enough to clear the market. This effectively created the "drop houses" in which criminal gangs abuse immigrants who have no legal recourse against them.

I expect that politicians will demand ramped-up enforcement, but this will be a mistake. The best way to proceed would be to end the war on drugs, end the war on immigrants, and scale back intervention in the housing market.

Art Carden
Memphis, Tenn.

Insulting Theater

On Monday President Obama proclaimed that General Motors "will be run by a private board of directors and management team.  They, and not the government, will call the shots and make the decisions about how to turn this company around."  And yesterday, two high-ranking members of his administration, writing in USA Today, dismissed the concerns of those persons who doubt the President's commitment to have politics "play no role" in running this company.

Alas, this political chicken wasted no time in coming home to roost.  Time reports today that

Top executives from General Motors and Chrysler face tough questions from lawmakers about sweeping plans to close hundreds of car dealerships as the auto companies undergo government-led bankruptcies.

The wonder is not that politicians are meddling.  The wonder is that America is populated with a sufficient number of people so gullible as to encourage Mr. Obama to issue his 'no politics' assurance with a straight face.

Dogs Bark

Here's the least-surprising headline of the day:

U.S. Rescue Aid Entrenches Itself

- to a report on this utterly predictable outcome:

Government officials remain concerned about the fragility of the financial sector. Their hesitance to fold these programs, and the financial industry's willingness to keep using them, has made it harder for regulators to re-establish a sense of market discipline, government officials say.

You Can't Take the 'Tics' Out of Politics

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

Councilwoman Melinda Katz's letter today reveals an ironic pitfall of government bailouts of private firms - namely, the inevitable demands by demagoguing politicians that recipient firms be hamstrung in their ability to respond to market forces.

Ms. Katz argues that credit-card companies that received bailout funds should be prevented from raising their rates.  While I have no sympathy for any firm that accepted taxpayer funds, the fact is that a firm must be able to change its prices in response to changing market conditions if it is to survive in the market.

By turning private firms into quasi-political entities, bailouts undermine their own ostensible purpose of making these firms strong and nimble competitors.

Sincerely,
Donald J. Boudreaux

Section 162(m)

In the public-choice seminar that I teach this semester at GMU Law, my class and I had a splendid conversation yesterday about Sec. 162(m) of the U.S. tax code.  (Most of the splendor of the conversation was supplied by my students, not be me.)

This tax-code provision was created in 1993.  It prohibits firms from deducting from their taxable incomes amounts above $1M paid to top corporate executives unless these excess amounts are compensation for meeting performance-based measures.

Want to speculate on the unintended consequences of this Clinton-administration effort to "rein in" executive salaries?!

Contracts are Not for Judges to Re-write

My colleague at GMU Law and at the Mercatus Center, Todd Zywicki, explains in today's Wall Street Journal why the increasingly popular idea of letting judges re-write mortgage contracts is a terrible idea -- one likely to perform its own market destabilization.

Stimulating Reading

In yesterday's Washington Post, Amity Shlaes warns against asking Obama to emulate FDR.

And in yesterday's Boston Globe, Jeff Jacoby issues a similar and equally wise warning.

Reality About 401(k)s

Duquesne University economist, and Mercatus Center scholar, Antony Davies has this spot-on letter in today's Wall Street Journal:

In the article "Big Slide in 401(k)s Spurs Calls for Change" (page one, Jan. 8), 35-year-old project manager Kristine Gardner says in response to the 44% drop in her 401(k) last year: "There's just no guarantee that when you're ready to retire you're going to have the money." Newsflash: Higher returns are the compensation for incurring risk, and lower returns are the price of safety. Ms. Gardner's 401(k) would have been completely safe had she shifted her investment allocations into money markets. As money markets yield a paltry 1%, Ms. Gardner's real complaint isn't that 401(k)s are unsafe, but rather that financial markets require her to incur risk in exchange for being compensated for incurring risk.

Retirement consultant Robyn Credico claims that "This is the biggest test that the 401(k) plan has seen . . . and it has failed." Au contraire, 401(k) plans have worked exactly as designed. It is the workers (and their retirement consultants) who have failed. There is only one reason why the average person close to retirement should have lost 50% of his 401(k): incompetence. Most workers at that age should have long since shifted the bulk of their 401(k)s into bonds and money markets. The 401(k) is a powerful investment tool but can be dangerous when abused.

If you aren't willing to put forth the effort to learn the principles of investing, that's your choice. But don't hobble the rest of us by asking for government regulation of a tool that works perfectly well just so that you can be spared the effort of figuring out how to use it.

Antony Davies, Ph.D.
Associate Professor of Economics
Duquesne University
Pittsburgh

In Praise of Sweatshops

New York Times columnist Nicholas Kristof is consistently excellent on the topic of sweatshops in poor countries.  Here's the ending of yesterday's column:

Look, I know that Americans have a hard time accepting that sweatshops can help people. But take it from 13-year-old Neuo Chanthou, who earns a bit less than $1 a day scavenging in the dump. She’s wearing a “Playboy” shirt and hat that she found amid the filth, and she worries about her sister, who lost part of her hand when a garbage truck ran over her.

“It’s dirty, hot and smelly here,” she said wistfully. “A factory is better.”

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.

On Layoffs

I speak here with Adam Davidson and Laura Conaway, on yesterday's episode of NPR's Planet Money, about the economic merits of layoffs.  To thrill to my mellifulous voice, start listening around the seven-minute mark.

Too Big to Fail?

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

Truer Words Were Never Spoken

Here's George Will in today's Washington Post:

The distribution of a trillion dollars by a political institution -- the federal government -- will be nonpolitical? How could it be? Either markets allocate resources, or government -- meaning politics -- allocates them. Now that distrust of markets is high, Americans are supposed to believe that the institution they trust least -- Congress -- will pony up $1 trillion and then passively recede, never putting its 10 thumbs, like a manic Jack Horner, into the pie? Surely Congress will direct the executive branch to show compassion for this, that and the other industry. And it will mandate "socially responsible" spending -- an infinitely elastic term -- by the favored companies.

Reality-Based?

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

Richard Epstein explains how the "Employee Free Choice Act," supported by Sen. Obama, will impose especially large burdens on small businesses - a fact at odds with Sen. Obama's pledge to promote such enterprises ("A Labor Dilemma for President Bam," Oct. 21).  By raising employers' costs of hiring American workers, this Act will also increase off-shoring, another phenomenon that Sen. Obama loudly deplores.

The general lesson here is that politicians are akin to faith-healers.  Both pose as wizards; they use enchanting words to push crackpot potions.  The faith-healer dupes his customers into believing that he will suspend medical reality; the politician dupes voters into believing that he will suspend economic reality.  Both are frauds.

Sincerely,
Donald J. Boudreaux

More Unhealthy Economics

Following up on this post, here's a letter that I sent on Friday to the Washington Post:

According to E.J. Dionne, "Few investments would help businesses more than offloading a share of their health-care costs to the government. It's social justice with an economic kick" ("Hoover vs. Roosevelt?" October 10).  Overlooking the questionable "justice" of forcing Peter to pay Paul's insurance premiums, Mr. Dionne's economics is wrong.

Government provision of universal health insurance won't reduce employers' costs of employing workers.  Worker pay - wages and benefits - is set by competition among employers for employees.  If competition obliges Acme Inc. to pay a worker an hourly wage of $20 plus health benefits worth $5 hourly, this fact means that Acme must pay this worker a total-compensation package of $25 per hour.  Because government provision of all health insurance would not reduce the value of this worker to Acme and other potential employers, competition would oblige Acme to raise the worker's hourly wage by $5 - the amount that Acme no longer must pay for health-insurance premiums.  Acme would still have to pay this worker a total-compensation package worth $25 per hour. 

Contrary to Mr. Dionne's assumption, government provision of universal health insurance would not reduce firms' costs -- although it would surely raise their taxes.

Sincerely,
Donald J. Boudreaux

I ignore in this letter the fact that employer-provided fringe benefits are untaxed, unlike wages.  I also make only passing mention that an inevitable consequence of government provision of universal health insurance is higher taxes.  These facts add wrinkles to the final equilibrium outcome (perhaps even big wrinkles), but they don't change the fundamental point that if worker Jones will produce $26 per hour for Acme Inc. and would produce $25 per hour for Megacorp, then Acme Inc. must pay Jones at least $25 per hour to get Jones's services; Acme Inc. must pay this sum regardless of how many goodies Jones gets from government.

Chummy In Washington

Here's a letter that I sent a few days ago to the New York Times:

To the Editor:

You're right that "In seeking to make lobbying an issue, Senator McCain has made one of hypocrisy" ("One Man's Crony ...," October 9).  But this fact hardly sets Sen. McCain apart.

Among the articles of faith of "progressivism" is the theory - which never yields to experience - that you can fill the sea with enormous quantities of fresh red meat and then, Moses-like, successfully command the sharks not to devour it.

As long as Uncle Sam continues to stock the Potomac by ripping from the body politic such enormous quantities of flesh and muscle - now more than three trillion dollars worth annually - sharks and vultures will inevitably swarm throughout Washington in a competitive struggle to gorge themselves on this unfortunate feast.

Sincerely,
Donald J. Boudreaux

Regime Uncertainty

What I find most scary about the current market turmoil are the shenanigans it fuels on Capitol Hill and its immediate environs.

Uncle Sam is, I worry, on the verge of creating the same kind of "regime uncertainty" that Bob HIggs effectively argues deepened and prolonged the Great Depression.

Still Hoping Against A Bailout

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

Deeply upset that the House of Represetatives voted against the bailout plan, David Brooks writes that "We're living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial" ("Revolt of the Nihilists," September 30).

So, pray tell, how will a massive government bailout of persons who behaved imprudently - a bailout inevitably injecting hundreds of billions of dollars of additional paper capital into the economy - solve the underlying problem?

As my colleague Richard Wagner points out, markets aren't intoxicated by large flows of capital per se.  Such bubblicious drunkenness results from capital that is politically supplied and directed - just the sort of capital promised by the bailout plan.

Sincerely,
Donald J. Boudreaux

Thomas Sowell on the Bailout

Thomas Sowell's latest is spot-on.

Here's an excerpt:

N. Gregory Mankiw, his {Pres. George W. Bush's] Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong "creates an incentive for a company to take on risk and enjoy the associated increase in return."

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt."

(HT Walter Williams)

No Bailout

My friend Bob Gelfond has this nice lead letter in today's Wall Street Journal:

I'm dismayed to see the Journal's editorial page give up its strong free-market principles in supporting the Paulson Plan with some minor tweaks ("The Paulson Sale," Sept 24). You have led the way in exposing government actions through regulation and support of government-sponsored enterprises as being the major contributors to the current crisis. Yet how is it that when the crisis deepens, the solution is for more government?

The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.

Bob Gelfond
New York

Indeed so.

"Lack of credit history should not be seen as a negative factor" Once Said the Boston Fed

Jeff Jacoby writes great good sense in today's Boston Globe.

She Earned an F

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

Hillary Clinton wants government to temporarily "freeze rate hikes in adjustable-rate mortgages" ("Let's Keep People In Their Homes," September 25).

The Senator's reasoning is akin to that of weak students who - offering excuses such as "My grandma died" - ask me to change their grades.  I always refuse by saying that grades are like market prices: they reflect an underlying reality.  Were I to change a student's grade arbitrarily, I wouldn't change his actual performance in my class or his command of the material.  I would merely send to the world a false signal about him, and encourage him to rely on such excuses in the future.

As a teacher, I can't make students smarter simply by lying about the grades they've earned.  As a Senator, Ms. Clinton can't make housing more affordable simply by forcing mortgage terms to lie about the reality of high risks and scarce credit that are reflected by unregulated mortgage-interest rates.

Sincerely,
Donald J. Boudreaux

Slipping Down the Slope

Ilya Somin, my colleague over at GMU Law, rightly worries about the slippery slope that the bailout plan is likely to perch us upon.

Today's column by the Washington Post's David Ignatius provides further evidence that this slope is both steep and slippery.  Mind - Ignatius himself isn't worried about slipping too far down a dangerous slope; rather, his proposal is evidence of how easy, in fact, it is to slip:

A truly Keynesian rescue plan should do more than bail out foolish investors. How might the pieces fit into a larger design? Well, if the taxpayers are going to acquire a stake in the nation's largest insurance company, perhaps that company can be the cornerstone of a new system of universal private health coverage. If the taxpayers are going to acquire $700 billion in real estate assets, perhaps the eventual profits can fund new investments in infrastructure or energy technology.

The Perils of 'Industrial Policy'

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I do my best to explain why "industrial policy" -- now being called for by some prominent business executives -- is a very, very, very, very, very bad idea.  I conclude my column with these paragraphs:

Uncle Sam, though, has sufficient power to keep its industrial policy "working" for quite some time.

But by "working," I mean working only on its own narrow terms. It would work to protect established producers by successfully freezing the economy, making static that which was once dynamic -- making stagnate that which was once constantly refreshed with new ideas and new opportunities and killing that which was once alive.

An industrial policy seriously pursued by Washington will make Americans (and, indeed, people all across the globe) significantly poorer. Prosperity is not, and cannot be, created or maintained by policies built on the premise that producers must be served by consumers.

Prosperity means the widespread satisfaction of consumer desires. Firms that satisfy those desires should be celebrated and left free to do their thing. But the moment they stop meeting consumers' desires, for whatever reason, these firms must also be left free to perish.

That's the only "industrial policy" we need.

Who's To Blame?

I don't know if John Lott is correct in suggesting that the editorial writers for the New York Times are trying to boost Barack Obama's prospects at the polls, but I do thank him for publicizing Steven A. Holmes's September 30, 1999 New York Times report.  Here are some telling lines from that report - telling especially in light of the NYT's current claim that the today's financial problems are the result of too little government regulation of financial-players' "dubious practices":

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people....

Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Fannie's and Freddie's Fates No Surprise to Good Economists

Monday-morning quarterbacking is as easy as it is self-indulgently gratifying.  Forward-looking perceptiveness is much more difficult and, hence, much more impressive.

In 2001, Jay Cochran (then with the Mercatus Center at George Mason University, and a GMU Econ PhD) and Catherine England (former Senior Policy Analyst at the Cato Institute) co-wrote this paper predicting trouble with Fannie Mae and Freddie Mac.  In a 2001 interview about the paper, Jay said the following about the special privileges Congress granted these government-sponsored enterprises (GSEs) :

These privileges do more than just give the GSEs a funding cost advantage, they also reinforce the perception of a federal guarantee on GSE debt obligations.  In order to avoid a federal bailout like the one we saw with the savings and loan industry, policymakers may want to consider a variety of alternatives, including privatization of one or more of the GSEs.

Walter Williams on the Market Correction

My GMU colleague Walter Williams speaks clearly and sensibly.

More on Short-Selling

Coyote Blog offers wisdom about short-selling.

Doh!

Let no one accuse politicians and bureaucrats of lacking Homeric courage.  When prices change in ways that disturb the electorate - whether it be gasoline prices rising or corporate share prices falling - the political class springs into action against prices that dare to truthfully reflect less-than-rosy underlying realities.

Like Homer Simpson who routinely deals with problems by closing his eyes and pretending that what he no longer sees no longer exists, government efforts to stop or modify price movements - such as the SEC's unprecedented ban on short-selling - merely blind markets to reality.  The result is immediate relief from unpleasant sights, followed by uncomprehending and harmful stumbling in the resulting darkness.

Optimism Quickly Fading

Like McCain, now I, too, would fire the head of the Securities and Exchange Commission (but for reasons different than those cited by Mr. McCain).

To ban short-selling of stocks is to short-circuit an important mechanism through which people share their knowledge and expectations with others.  Banning a mechanism that better allows share prices to reflect the expectation that the underlying assets are not worth as much as current market prices suggest does nothing to change the underlying reality.  Such a ban merely distorts knowledge of this reality.

My optimism about the future, which as recently as yesterday was real, is truly beginning to fade.  The news about the SEC's ban on short-selling is annoying; this news about a "vast bailout" is distressing.

Make Risky Loans!

This letter in today's Wall Street Journal hits an important nail square on the head:

Regarding your editorial "Fannie Mae's Patron Saint" (Sept. 9): We are all talking about subprime loans and the havoc they've wreaked on the economy, but no one is talking about why banks give out these loans -- they are required to by law. Since the Community Reinvestment Act of 1977, Congress requires banks to offer loans to minorities in low-income areas, even if the clients can't make down payments, don't have good credit histories, or even employment histories.

Since these clients are high-credit risks, the only loans lenders can offer are high-interest loans that don't require a down payment or good credit history. These loans frequently default.

In order to cut down on the number of subprime loans an institution must make, it must cut down on all loans, because its subprime business is a proportion of its overall business.

Are we willing to crash our economy over some misplaced idealism? Congress must rescind the CRA or this problem will continue beyond today's bailouts.

M. Franks

Little Rock, Ark.

The foolishiness that is the Community Reinvestment Act is not the only reason for the mortgage-market meltdown, but it must be exposed and take its share of the blame.

"Sex Is Pleasurable, Studies Show"

Yahoo! News

Dear Sir or Madam:

The headline of one of your reports today (Sept. 4) from the Associated Press reads "Sarah Palin and her fellow RNC speakers weren't completely truthful at times."  Wow.

Why not also run a report with the headline "Law of Gravity Still Working," or one screaming "Julius Caesar Remains Dead!"?  Deceitful politicians are as newsworthy as ants at a picnic - although much more avaricious and annoying.

Sincerely,
Donald J. Boudreaux

My Mellifluous Voice

Here's Norm Leahy's 30-minute-long radio interview with me, taped earlier today.

Politics Brings Out the Fools in Nearly All of Us

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

George Will is correct: most of Barack Obama's economic ideas are idiotic ("Little Rhetoric Riding Hood," August 24).  But, along with many of John McCain's equally moronic ideas, they sell big-time - which is the very reason these candidates persistently deliver such preposterous lines.

Washington is no less diligent than is Hollywood at satisfying the public's demand for heroic adventures, epic fantasies, and fairy tales.  Each production stars supercilious superstars portraying characters boasting magical powers and godly goodness.

The only difference between Hollywood and Washington is that, while audiences understand Hollywood's leading men and women to be acting, this same ability to distinguish fantasy from fact disappears when the executive producer is Uncle Sam.

Sincerely,
Donald J. Boudreaux

The Minimum-Wage and Poverty

Here's a letter of mine published in the August 7 edition of the Baltimore Sun:

The Sun should rethink its editorial "Rethinking minimum wage" (Aug. 4).

The editorial's account of history is flawed; the federal minimum wage began in 1938, not in the 1950s.

More important, it's untrue that the data  are "compelling" that "a minimum wage is helpful in the fight against poverty."

Economists Joseph Sabia and Richard Burkhauser, in research published last year in the respected journal Contemporary Economic Policy, found that "minimum-wage increases (1988-2003) did not affect poverty rates overall, or among the working poor or among single mothers."

This finding is consistent not only with the fact that just a tiny fraction of workers (less than 5 percent) are paid wages as low as the minimum wage and the fact that 80 percent of minimum-wage workers live in non-poor households but also with the findings of other rigorous studies.

Donald J. Boudreaux

No Plunder

Here's a letter that I sent today to the Director of the Coalition for Pulmonary Fibrosis:

Dear Sir or Madam:

I received your e-mail encouraging me to ask my representatives in Congress to vote for H.R. 6567, which would "increase federal research funding for idiopathic pulmonary fibrosis."

Even though in March IPF killed my dear mother, I cannot join your crusade for more taxpayer funding to fight this horrible disease.  Congress does not conjure resources from thin air; any resources devoted to finding a cure for IPF must be taken from some other use - and there's no reason to suppose that Congress can judge better than private individuals how best to use resources.  Who's to say that resources taken by government from the private sector to support IPF research would not yield even greater long-term benefits by being left in the private sector? Perhaps resources devoted to IPF research would otherwise have been used to cure leukemia or to develop an automobile engine powered by water.

More importantly, being touched tragically by that disease gives me no moral claim to have Congress, in my name, take resources from other people.  I can, and do, ask people to voluntarily fund IPF research.  I cannot, and will not, support any effort to force them to do so.

Sincerely,
Donald J. Boudreaux

A Cause for Applause?

The national minimum-wage rises today from $5.85 per hour to $6.55 per hour.  In other words, Uncle Sam today arbitrarily increases the cost of employing low-skilled workers by 12 percent.

How Pressing a Problem is Global Warming?

The important work of Bjorn Lomborg -- the Skeptical Environmentalist and organizer of the Copenhagen Consensus Center -- is the subject of this insightful essay in today's edition of the Wall Street Journal.  Here's a slice:

Even as the U.S. Senate debates a vast new tax and spend regime in the name of fighting climate change, a more instructive argument was taking place in Copenhagen, Denmark. Some of the world's leading economists met last week to decide how to do the most good in a world of finite resources.

Scarcity is a core economic concept, though politicians and even many economists prefer to ignore it. There isn't an unlimited amount of money to be spent on every problem, so choices have to be made. The question addressed by the Copenhagen Consensus Center is what investments would do the most good for the most people. The center's blue-ribbon panel of economists, including five Nobel laureates, weighed more than 40 proposals to improve the world by spending a total of $75 billion over the next four years.

What would do the most good most economically? Supplements of vitamin A and zinc for malnourished children.

Number two? A successful outcome to the Doha Round of global free-trade talks. (Someone please tell Barack Obama.)

Global warming mitigation? It ranked 30th, or last, right behind global warming mitigation research and development. (Someone please tell John McCain.) The nearby table lists other rankings.

"It's true that trade doesn't immediately save lives," explains Bjorn Lomborg, the political scientist who heads the Copenhagen Consensus Center. "But it's proven that when people have more money" – as tends to be the case when trade barriers fall – "they improve their health, their education and so on." The resulting prosperity reduces such problems as malnutrition and disease, while improving education. All three of those ranked high on the priority list.

The benefits of freer trade were estimated in a paper presented by Professors Kym Anderson and Alan Winters. They found that a successful Doha Round could generate up to $113 trillion in new wealth during the 21st century, at a cost of $420 billion or less from inefficient industries going bust. If you like ratios, that's a return of $269 for every $1 of cost. A less conservative projection puts the gains three times higher. More than 80% of this global windfall would go to the world's poorest countries.

Vernon Smith, Professor Emeritus of Economics at GMU (and 2002 co-winner of the Nobe Prize in Economic Science), is among the scholars active in Prof. Lomborg's important enterprise.

Sweatshops

Suffolk University economist Ben Powell (who, I'm proud to say, earned his PhD at GMU Economics) defends sweatshops here.

Price Controls and the Reign of Terror

In their 1975 book The Age of Napoleon, Will and Ariel Durant argue that the Reign of Terror during the French revolution was sparked, in part, by price controls.

The economy itself was a battlefield.  The price controls established on May 4 and September 29 [1793] were being defeated by the ingenuity of greed.  The urban poor approved the maxima; the peasants and the merchants opposed them, and increasingly refused to grow or distribute the price-limited foods; the city stores, receiving less and less produce from market or field, could satisfy only the foremost few in the queues that daily formed at their doors.  Fear of famine ran through Paris and the towns....

On August 30 a deputy pronounced the magic word: Let Terror be the order of the day.  On September 5 a crowd from the sections, calling for "war on tyrants, hoarders, and aristocrats," marched on the headquarters of the Commune in the Hotel de Ville.  The mayor, Jean-Guillaume Pache, and the city procurator, Pierre Chaumette, went with their delegation to the Convention and voiced their demand for a revolutionary army to tour France with a portable guillotine, arrest every Girondin, and compel every peasant to surrender his hoarded produce or be executed on the spot [pp. 62-63].

"Earth Hour" and the Dark Ages

The World Wildlife Fund arranged today's "Earth Hour" -- a pledge by many people from around the world to turn off lights for an hour.  The following is from a page on the WWF website:

Earth Hour is a global event created to symbolize that each one of us, working together, can make a positive impact on climate change - no matter who we are or where we live.

Created by WWF in Sydney, Australia in 2007, Earth Hour has grown from a single event into a global movement. In 2008, millions of people, businesses, governments and civic organizations in nearly 200 cities around the globe will turn out for Earth Hour. More than 35 US cities will participate, including the US flagships--Atlanta, Chicago, Phoenix and San Francisco.

Earth Hour brings together communities, local governments, corporate and nongovernmental organizations to heighten awareness about climate change and to inspire our nation to take practical actions to reduce their own carbon footprints.

Reading about the WWF's "Earth Hour" -- and hearing on the radio and t.v. too many mindless endorsements of this stunt, and seeing Google's special black "Earth Hour" design for its opening page today -- I sent the following letter to Carter Roberts, President of the WWF:

Dear Mr. Roberts:

You and members of your organization worry that industrialization and economic growth are harming the earth's environment.  I worry that the intensifying hysteria about the state of the environment - and that the resulting hostility to economic growth - might harm humankind's prospects for comfortable, healthy, enjoyable, and long lives.

So I commend you on your "Earth Hour" effort.  Persuading people across the globe to turn off lights for one hour supplies the perfect symbol for modern environmentalism: a collective effort to return humankind to the dark ages.

Sincerely,
Donald J. Boudreaux

By the way, of course, the WWF should award some special prize to the North Korean government, for that government keeps North Koreans not in any meager "Earth Hour," or even "Earth Day," but in what WWFers might call "Earth Decades" -- very little light ever.  This picture of the Korean peninsula speaks volumes -- the Dark Ages today; a society keeping its carbon footprint tiny.  Of course, in doing so it keeps itself also desperately poor, often even to the point of starvation.

Miracles Performed Beneath Marble Domes

Rep. Bill Sali (R-Idaho) understands economic processes.  Here's his smack-down of minimum-wage legislation.  (HT to Amit Varma at India Uncut.)

The War and Wildfires

This morning I heard a report on the radio of Senator Barbara Boxer (D-CA) complaining that the war in Iraq interferes with government's ability to fight the wildfires in southern California.  No doubt.  But.....

I oppose the war in Iraq; I always have done so.  But this war, while it does interfere with efforts to extinguish wildfires, does not interfere any more so than does nearly any other government program you care to name.  Resources have multiple uses and are scarce.  To use a worker or raw materials fighting a war is to take that worker and those materials, at least for a time, away from other potentially valuable uses.

The same is true of using workers and other resources to fight the "war on drugs" -- or using workers and other resources to administer agricultural price-support programs -- or using workers and other resources to run the Departments of Education, Transportation, Commerce, and so on -- or using workers and other resources to enforce the Endangered Species Act.

The question is not does fighting the war in Iraq reduce government's (and private persons') ability to battle the wildfires.  Of course it does.  The questions are, rather, are too many resources devoted to fighting the war?  Will Americans likely be made better off by taking some resources away from the war effort and put instead to other uses?

My answer to these questions is yes, mostly because I believe that the war is both unjustified and counter-productive.  But the fact that the war effort detracts from the ability to get other goodies is not itself a sound argument against the war.

I'm delighted that Senator Barbara Boxer is aware of opportunity costs -- that she understands that resources used to do X become unavailable to do W,Y, and Z.   I hope that she'll extend this insight to ask hard questions about the desirability -- and about the costs -- of the countless government programs that she supports.

Reality Is Not Optional

The web-only edition of today's New York Times published this letter of mine on health care.

Who cares what modern health care-delivery methods are called? The elemental problem is that more and more people feel entitled to vast quantities of high-quality health care paid for by someone else.

And politicians, ever lusting for office, are only too happy to conjure the ridiculous illusion that A will get top-flight service from B when C is forced by G to pay the bills.

Donald J. Boudreaux
Fairfax, Va., Sept. 28, 2007
The writer is chairman of the economics department, George Mason University.

The author of the letter published along with mine is like so many others: he forgets that -- to steal Thomas Sowell's phrase -- reality is not optional.  Calling health care "a necessity" does nothing to make it universally available in quantities and qualities sufficient to satisfy all demands that would be expressed for it by individuals each of whom is not required personally to pay for the care he or she receives (or seeks to receive).

TANSTAAFNP

Here's a letter I sent recently to a local radio station in D.C.

15 September 2007

News Editor, WTOP Radio

To the Editor:

I waited in vain for you to draw your listeners' attention to the connection between two of your reports today.  The first report - delivered in a grave voice - was of how rising rents are financially squeezing low-income families.  The cause you give for these rising rents is a "housing shortage."

The second report - delivered in an upbeat, almost triumphant voice - was of how Virginia Gov. Tim Kaine has set aside yet more land in that state as a nature preserve.

As government declares more and more land off-limits for development, it reduces the potential supply of new houses and apartments, thereby causing housing prices and rents to rise.  More nature preserves might be desirable, but people should be made aware of their long-term costs.

Sincerely,
Donald J. Boudreaux

Frank Talk on Status

In response to this review by Daniel Gross of Robert Frank's latest book, I sent the following letter to the New York Times Book Review:

Reviewer Daniel Gross should have asked harder questions about Robert Frank's argument that higher taxes on "the rich" will moderate individuals' quest for status ("Thy Neighbor's Stash," August 5). Monetary wealth and the material goodies it buys are hardly the only source of status.  Consider, for example, Prof. Frank's faculty position at Cornell University.  He earned this position in large part through his hard work.  By his own thesis, then, he inadvertently caused other scholars to work unnecessarily hard in their quest to win high status Ivy-League appointments -- a quest that for the vast majority of us futile.

Higher taxes on the rich will do nothing to create more Ivy League faculty positions, more mansions with stunning views of the Pacific ocean, a greater number of the world's most beautiful women or most eligible bachelors, or most of the other things that confer and signal high status for those who possess them. Frankly, it is naive to suppose that muting competition in markets will mute humans' competition for status.

Indeed, given that humans are quite status-conscious, a social system in which we seek status chiefly through earning money provides what is likely the best available outlet for this proclivity -- namely, competition within private-property-based markets.  Not only does it result in new and greater quantities of goods and services for others, but it sure beats the hell out of violence and even politicking as a means of challenging others for status.

A Lesson from Passport Control

Late Friday evening, Karol and I flew, on Delta Airlines, from Bucharest to New York's JFK airport.  We had two hours to connect to our Delta flight to Washington's Dulles airport.  We missed our flight.  And herein lies a lesson.

The reason we missed our flight is that nearly 50 minutes of our time after landing was consumed by waiting in a long and slow-moving line to clear passport control.  At that terminal on Friday evening, the TSA had only three agents to service the line of U.S. citizens returning from abroad.  Three.  That's it.  Most of the passport-control-agent booths stood empty.

So as we silently fumed and inched forward in line, I couldn't help but wonder why so many people want the same agency that cannot adequately staff one of the country's busiest international airports (during the height of international-travel season) to run Americans' health-care.  If government were to take over more completely the supply of medical services in the U.S., the same sorts of under-staffing (i.e., shortages of service) would occur.

In light of my recent experience -- which isn't unusual -- at JFK, can anyone give me a plausible reason why I should be optimistic that government would adequately staff (and maintain - remember Walter Reed!) its hospitals and medical clinics?  With the same general set of incentives facing bureaucrats who now supply "passport control" facing bureaucrats who would supply medical care, it's a childish fantasy to imagine that people needing medical care would not encounter unnecessarily long queues when seeking government-supplied medical care.

Those persons who think me cynical, or who think that I draw a mistaken lesson from my experience at passport control, should ask themselves as seriously as they can just why they suppose that government-supplied medical care will not be characterized by the kinds of frustrations that travelers and post-office patrons routinely suffer.

An Anecdote on Health Care

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

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

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

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

Like Humidity in New Orleans....

The world, it is trite to say, is unpredictable.  Indeed so.

But there are exceptions to this rule.  There is a sizable handful of predictions that I would bet my pension will prove accurate at least 99 out of 100 times.  I predict, for example, that next year every football team that wins a big game will feature a gigantic lineman dumping the contents of a Gator Aid cooler over the happy head of the team's Head Coach....  I predict that every American politician seeking office will claim to know what "the American people" want and that he or she is most trustworthy champion of that collective desire.... I predict that Paul Krugman's next New York Times column will self-righteously accuse the Bush administration or "conservatives" of evil-intentions and evil-doings....  And I predict that every political strongman will blame "speculators" for many of the  economic ills that befall the citizen-victims of their countries.

And lo!  Lookie here!

Meat cuts vanished from Venezuelan supermarkets this week, leaving only unsavory bits like chicken feet, while costly artificial sweeteners have increasingly replaced sugar, and many staples sell far above government-fixed prices. 

President Hugo Chavez's administration blames the food supply problems on unscrupulous speculators, but industry officials say government price controls that strangle profits are responsible.

The above is from this report filed today by an AP reporter in Caracas.

(Hat tip to Cafe commentor Aschkan.)