Cafe Hayek

Free the Market for Body Organs

The Boston Globe's Jeff Jacoby eloquently challenges the refusal to allow transplantable body organs to be freely bought and sold.  Here are his closing paragraphs:

No one would dream of suggesting that medical care is too vital or sacred to be treated as a commodity, or to be bought and sold like any other service. If the law prohibited any “valuable consideration’’ for healing the sick, the result would be far fewer doctors and far more sickness and death.

The result of our misguided altruism-only organ donation system is much the same: too few organs and too much death. More than 100,000 Americans are currently on the national organ waiting list. Last year, 28,000 transplants were performed, but 49,000 new patients were added to the queue. As the list grows longer, the wait grows deadlier, and the shortage of available organs grows more acute. Last year, 6,600 people died while awaiting the kidney or liver or heart that could have kept them alive. Another 18 people will die today. And another 18 tomorrow. And another 18 every day, until Congress fixes the law that causes so many valuable organs to be wasted, and so many lives to be needlessly lost.

Update: Jeff reminds me that he first wrote about this topic back in October 2003.

The Psychology of Climate Change and Intervention

Writing in today's New York Times, Nicholas Kristof argues that we're not as frightened of climate change as science counsels that we should be, and that our fear's inadequacy is rooted in our evolutionary past.  We are, Kristof correctly says, evolved to fear immediate, visible threats and not so much those threats - such as climate change - that are more distant, more speculative, and less visible.

Contrary to Kristof's conclusion, though, this fact doesn't necessarily justify climate-change regulation.  The same evolved structure of our brains that causes us to discount relatively distant and speculative climate-change effects also causes us to discount relatively distant and speculative economic effects.  So this economist, trained to see the invisible hand, points out that too many people are insufficiently aware of - and, hence, insufficiently fearful of - those relatively distant and invisible threats posed to a healthy economy by government regulation.

Unintended Consequences

Here' my answer to my pop quiz; it's in the form of a letter-to-the-editor that I sent yesterday to the Washington Post:

You report that the "International Trade Commission recommended on Monday that President Barack Obama impose additional duties for three years on imports of low-cost Chinese tires the panel says are harming U.S. industry" ("U.S. trade panel favors stiffer duties on Chinese tires," June 29).

Such a move by Mr. Obama would not save U.S. jobs on net, because fewer dollars spent on imports means fewer dollars that foreigners have to spend on U.S. exports or to invest in the U.S.

More importantly, in this case higher duties would actually kill people.  Higher duties mean higher tire prices, and higher tire prices will prompt many motorists to ride longer than otherwise on tires that are threadbare.  Because riding on older tires is more dangerous than riding on new tires, Mr. Obama will have blood on his hands if he accepts the I.T.C.'s recommendation to stiffen duties on low-cost tires.

Sincerely,
Donald J. Boudreaux

Thanks to all of you who answered the quiz in the comments section of my previous post (or in e-mails to me), and congrats to the many of you who earned A+.

Tired Protectionism

The U.S. International Trade Commission recently recommended to President Obama that he raise import duties on low-priced automobile tires from China.

Pop quiz: If Mr. Obama accepts this recommendation, why will he have then have blood on his hands?

Class Credit

Is the hot-off-the-press Credit Card Accountability, Responsibility and Disclosure Act "likely to bring about moderate, and even positive, changes" -- as Ryan Bubb and Alex Kaufman argue in today's New York Times?  I'm skeptical.

Bubb and Kaufman -- economics doctoral candidates at Harvard -- argue that the terms that have been offered for years by credit unions that issue credit cards have long met the terms demanded by this new piece of federal legislation.  So because credit unions have obviously been able to earn sufficient profit over the years by issuing credit cards with terms similar to those now demanded by Uncle Sam, investor-owned banks that issue credit cards will similarly be able to earn sufficient profit.

If Bubb and Kaufman are correct, it follows that few, if any, deserving consumers will suffer any increased difficulties in getting credit.

But Bubb and Kaufman (rather mysteriously, in my view) go on to say the following:

Credit union cards are a great test case for how regular cards will perform under the new law. The evidence so far suggests that the credit card act is likely to bring about moderate, and even positive, changes. Card issuers, after all, need to retain customers. Any bank that attempts to pad its bottom line by, say, levying large annual fees will likely see its customers flee to credit unions or to banks that emulate the credit union model.

The last two sentences quoted above make good sense.  They raise the question, though: why didn't we see any such flight or emulation in the past?  Were consumers dumb or careless before the enactment of the new legislation and somehow now are smart and responsive?

I haven't read the research that Bubb and Kaufman mention in their op-ed, but I wonder if they controlled for the possibility that the class of credit-card customers most profitably served by banks differs from the class of credit-card customers most profitably served by credit unions.  If the customers of one type of institution differ significantly (in their credit histories, income profiles, rate of card usage, etc.) from the customers served by the other type of institution, then credit terms profitably offered by one type of institution are not necessarily profitable for the other type of institution.

Given Bubb's and Kaufman's explicit understanding that competition is at work in the credit-card-issuing industry, it's not clear to me why they are confident that new restrictions imposed by Uncle Sam will have no deliterious effects upon consumers.

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.

Unfairness -- and Anti-Freedom -- Doctrine

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

Seth Hill writes that "Every time I'm surfing channels and I happen by mistake to land there [on the Fox News channel], I have to watch a commentary by [Newt] Gingrich or former Vice President Dick Cheney.  That channel makes me long for the days of the Fairness Doctrine" (Letters, June 19).

Mr. Hill's attitude is the seed of totalitarianism: unable to distinguish what he does voluntarily from what he is coerced into doing, he wants to use force to save himself from the annoyance of fleetingly encountering disagreeable ideas as he flips his channel changer - and to use force to hamper other persons' access to those ideas.

There's nothing fair about that.
 
Sincerely,
Donald J. Boudreaux

Writing in the January 1997 issue of the Journal of Legal Studies, my GMU colleague Tom Hazlett and co-author David Sosa found that the Fairness Doctrine chilled public discourse.

Beware Hidden Taxes

Writing in today's Boston Globe, former OIRA chief Susan Dudley (along with Jeff Rosen) warns -- very sensibly -- that we should beware of hidden taxes.

Not a Killer Question from the Protectionist

The proprietor of www.ssotu.com responded to my first letter to him with an e-mail asking me a question.  Here's my reply:

Mr. Mark ________
Proprietor, www.ssotu.com
Melbourne, Australia

Dear Mr. ________:

Opposing free trade, you challenge me to answer the following question:

"You [Boudreaux] are appointed the Chief Terminator of Economic Ignorance at a salary of $150,000 a year.  Things are going great for a while, then one day you're told your job will now be done from India for just $10,000 a year.  How are you going to feed your family?"

Such a question elicits many complementary answers.  Here, for now, is just one - in the form of some questions for you: Suppose that people no longer wish to incur the cost of escaping economic ignorance; suppose that people's preferences change - say, people switch from preferring economic education to preferring more chemistry or theology education, subjects about which I know nothing.  Demand for my services as an economic educator dries up.

Does the fact that my income falls dramatically as a result of this economic change give me the right to force people to continue to purchase my services?  Are people morally obliged, having once voluntarily paid me well to perform a service for them, to continue to pay me well for as long as I wish to be occupied in supplying that service?  Does a change in my economic circumstances entitle me (either directly, or through my representatives in government or through some street thugs whom I might hire) to prevent people from spending their money on instruction in chemistry or theology or on other goods and services?

Sincerely,
Donald J. Boudreaux

My answer to these questions is an unambiguous, emphatic, and unconditional "no."

Reed It

Larry Reed -- President, appropriately, of FEE (the organization that has done the most to promote Bastiat to American audiences) -- does a truly splendid job exposing the economic ignorance that infects a report appearing in a recent edition of the New York Times.

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?!

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.

The Unsung Successes of the Market

It's become an article of faith among lots of people that recent events prove (or at least suggest) that markets don't work very well.

Let's assume -- contrary to what my assessment of the evidence tells me -- that the housing bubble and its crash, along with the current ills suffered by Detroit and other sectors, are exclusively the fault of the market.

How much skepticism of markets would this fact generate relative to the amount of skepticism that is justified?  I think way too much.  The reason is that market successes go unnoticed and, hence, unappreciated.

The vast majority of market exchanges and relationships work smoothly and to the advantage of all participants.  Indeed, the market works so well and so consistently that it creates ever-higher expectations among the broad populace.  When these expectations are dashed, if only for a handful of persons and if only rarely, the market is deemed to have failed.

But despite the current downturn, the market continues to work well in its typical silence.  Do you have trouble today finding gasoline to buy?  Are your local supermarket's shelves not stocked with food, wine, and (watch for it soon!) Easter candy?  If your cat eats your socks, will you have trouble buying several new pair?  If your car's battery dies this afternoon, must you resort to bicycling or public transportation because you can't replace your dead battery?  If you're bored this evening with nothing to do, is there no movie you can go to or no DVD you can rent?  If you miss your mom in Minneapolis or your boyfriend in Boston, can you not call them on your cell-phone -- or even buy a plane ticket and go visit them?

Two items arrived in my e-mailbox this morning to drive home the remarkable success of markets.  The first is this excellent short essay by Bob Higgs.

The second is this hilarious, short dialog between the comedian Louis C.K. and Conan O'Brien.  (Note that O'Brien mistakenly believes that our modern standard of living is caused principally by technology.) (HT Rudy Schober)

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.

The seen and the unseen

The AP reports (HT: Drudge):

President Barack Obama says Caterpillar's chief executive has told him the company will rehire some laid-off workers if the stimulus bill passes.

The heavy equipment maker announced more than 22,000 job cuts last month as it scales back production amid the economic slowdown.

During a visit to a transportation construction site just outside Washington in Springfield, Va., on Wednesday, Obama urged Congress to pass the bill.

The House and Senate are working out differences between competing versions of the legislation.

Obama said Caterpillar's CEO has told him that if the stimulus bill passes he would be able to rehire some of those employees.

Obama is to speak with some of those workers on Thursday when he visits a Caterpillar manufacturing plant in Peoria, Ill.

Just a few disturbing aspects of this brief story:

1. A CEO tells the President what he wants to hear. Wonder if that will help steer some business Caterpillar's way.

2. The President quotes a CEO's claim as if it's a fact.

3. If it turns out to be true, and if Caterpillar does indeed hire some workers it has laid off, that's a reason to support the stimulus bill. No mention of any costs that might be paid to get those workers hired. It's magic! The government spends my money and yours and the economy recovers. The workers who will not get hired because our taxes are going to be higher in the future go unseen.

Perspectives on Trade and Romance

After reading this letter, read my take on romance.

Upside to Suicide

New York Times columnist Floyd Norris argues that there is "an upside to resisting globalization."  It is this: economies unintegrated into the global economy aren't very much subject to global-economy downturns.

To be sure, Mr. Norris is correct.  But the Times should be consistent and have, say, one of its medical reporters write about the upside to suicide.  Suicide's practitioners, after all, inoculate themselves against all future illnesses.

Is Keynesian Economics Really Economics?

In today's Wall Street Journal, Dick Armey very nicely explains why Washington needs less Keynes and more Hayek.  Here's a key paragraph:

Keynes's thinking was a decisive departure from classical economics, because arbitrary "macro" constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, "some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics."

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.

A World of Monopolists -- THAT'S the Ticket!

Here's a letter that I sent recently to the Baltimore Sun:

C. Paul Mendez wants to protect American workers from competition with a moratorium on immigration (Letters, Jan. 28).  Why stop there?  Why not also impose moratoria on worker training and on technological advances?  After all, improved worker skills and more highly developed production techniques increase worker productivity.  The result is that any given amount of output is produced using fewer workers.  So worker training and technological advances, no less than immigrants, also compete with many existing workers.

In truth, any such moratoria are moratoria on sources of economic growth - never wise moves at any time, but especially not during times such as these when investors are especially leery of committing funds to long-term projects.

Sincerely,
Donald J. Boudreaux

Rents to Rockford

Hometown hero calls it accurately.

Government Does Not Know Better (Or Even As Well)

Economist Bill Shughart (a former GMU colleague, by the way) has this excellent op-ed in today's Washington Times; it's on the folly of even small-scale government 'industrial policy.'  Here are Bill's concluding paragraphs:

The truth is: It is not government's function to create jobs. Putting people to work is easy, as demonstrated by Franklin D. Roosevelt's Depression-era Works Progress Administration (WPA), more accurately known as "WPA: We Piddle Around." The bigger challenge is to create wealth. Toyota failed to foresee the economic events that caused its expansion plans to unravel.

Keep this in mind when Congress and the White House are selecting economic stimulus projects to fund this year.

If highly successful private firms like Toyota - with their extraordinary market research and years of savvy and experience - sometimes embark on projects that turn sour, how can we expect politicians, most of whom have no such business know-how, to pick winners?

There is a difference, however. Companies usually risk their own money. In Washington, the politicians will be risking ours.

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.

Making the Invisible Hand Visible

Seen and unseen.

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.

Outliers

Overflowing with outliers.

The Bailout Will be Televised

What is seen and what is not seen in the proposed bailout of GM, Ford, and Chrysler.

Covering Their Arses

University of Missouri-St. Louis economist David Rose sent the following to me by e-mail regarding Uncle Sam's bailout of GM, Ford, and Chrysler:

Here is what is especially galling about this. If central planners took overt control of a number of industries and then ran them into the ground, then there would be a clear lesson learned. Instead, they take partial control through regulation and now through "investment," still run such companies into the ground, but can then blame it on the market system.

Exactly right.

Yet Another Reason I Dislike Politicians

Yesterday I participated in a seminar sponsored by the University of South Carolina Law Review on today's financial crisis.

It was a high-quality affair; I learned much.

One participant, however, caused me to wince.  This participant was a U.S. Representative from North Carolina, the Hon. Brad Miller.  He began his remarks by pointing out that he was the only non-academic speaking at the seminar.  Upon hearing this remark, I guessed correctly what he'd say next.  It went something like this:

Unlike academics, I don't see things with theories.  I see things with my eyes.  And I trust my eyes.

Ah yes, the practical man, unhampered by the blinders of theory, refusing to drink of the inebriating elixir of abstract thought.  He looks at the world as it is, straight on, seeing plainly what the theories of woolly headed academics only cause to be misperceived and misconstrued.

Of course, when this particular practical man -- this paragon of common sense and enemy of scholastic ceteris paribus-es -- looks at the world, he sees plainly that greed and deregulation are the cause of today's problems.  (He also, by the way, determined that greed was the cause of the Great Depression by seeing that Franklin Roosevelt said that it was so.  He quoted FDR.)

The implication of this instance of ignorant populism, of course, is that theories only confound sound thinking.

The setting was not one conducive to a debate on epistemology or methodology, so I kept my mouth shut -- but had I opened it, I would have simply asked the Hon. Mr. Miller what he sees when he stands outside and looks at the relationship of the sun to the earth.  Surely he sees the sun revolving around a perfectly still and stationary earth.  He also sees a flat earth.

Were he consistent, he would proudly claim membership in Flat-Earth Society, and wear a lapel button proclaiming that Galileo was wrong.

My great teacher, Leland Yeager, quoted Norman Campbell's wonderful smack-down of such ignornant criticisms of theorizing:

The plain man -- I do not think that this is an overstatement -- calls a "theory" anything he does not understand, especially if the conclusions it is used to support are distasteful to him.... It is only because he does not understand "theory" that the plain man is apt to compare it unfavorably with "practice," by which he means what he can understand.

The practical man is apt to sneer at the theorist; but an examination of any of his most firmly-rooted prejudices would show at once that he himself is as much a theorist as the purest and most academic student; theory is a necessary instrument of thought in disentangling the amazingly complex relations of the external world.  But while his theories are false because he never tests them properly, the theories of science are continually under constant test and only survive if they are true.  It is the practical man and not the student of pure science who is guilty of relying on extravagant speculation, unchecked by comparison with solid fact.

The Hon. Mr. Miller's remark that he can see, without the need of any theory, the causes of this crisis is more ridiculous than is Tina Fey's intentionally comical remark, in her parody of Sarah Palin, that a governor who can "see Russia" from her house is well-equipped to carry out foreign policy.

More Lazy Fare

Here's a letter that I sent last week to the Baltimore Sun:

Rena Steinzor blames today's financial unrest on "knee-jerk opposition to federal regulation" ("Reviving regulation," Sept. 28”).  Her solution, of course, is greater government involvement in the economy.

But on the very same op-ed page, Cynthia Tucker put part of the blame (rightly so) on George W. Bush: "The White House bragged on programs to make borrowing easy, including an initiative to allow the Federal Housing Administration to insure mortgages for first-time homebuyers without a down payment" ("Minorities a convenient scapegoat for U.S. financial woes").

Clearly, the only knees jerking of late are not those of conservative politicians opposing government intrusion into markets but, rather, of persons such as Prof. Steinzor who lazily assume that laissez faire has been the order of the day.

Sincerely,
Donald J. Boudreaux
George Mason University

Sensible Voices Against the Bailout

Dan Mitchell wisely and eloquently opposes a bailout.  So, too, does Jeffrey Miron.

Likewise, David Harsanyi speaks good sense on this topic (save for his criticism of the repeal of the Glass-Steagall Act).

And Arnold Kling, of course, is another voice of reason.

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)

Genetically Engineered Chickens Coming Home to Roost

In today's Wall Street Journal, Columbia University economist Charles Calomiris (one of the most respected money and banking economists of our era) co-authored this essay with Peter Wallison that argues that Congress pushed Fannie and Freddie to make high-risk mortgage loans.  Here are a few passages from the article:

The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

......

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.

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.

"The Hotel of Impossible Promises"

Bob Higgs understands and eloquently explains the fundamental reason why Fannie and Freddie collapsed.

On this same topic, I sent the following letter a few days ago to the New York Times:

To the Editor:

Coming as it does during the crisis involving Fannie Mae and Freddie Mac, Bob Herbert's unconditional praise of Medicare and Medicaid is curious ("Hold Your Heads Up," September 9).

Fannie's and Freddie's troubles are textbook examples of what happens when gain is privatized while risks and losses are socialized: private decision makers are led by an invisible hand to screw things up.  The same underlying dysfunctionality that created America's housing-market troubles is needlessly driving up health-care costs: Medicare and Medicaid privatize the benefits of health care (medical attention for patients and handsome fees for physicians) while socializing the costs.  Spending other people's money leads patients and doctors to overuse, and to use inefficiently, health-care resources - and, thus, to unnecessarily drive up health-care costs.

Sincerely,
Donald J. Boudreaux

Russ's May 18, 1995 Wall Street Journal essay is also relevant here.

Rising Incomes and Falling Income Statistics

Here's a letter that I sent recently to the Washington Post, in response to the same Robert Samuelson column that Russ blogged on:

Robert Samuelson helpfully explains why the data routinely cited to show the alleged economic stagnation of middle-class Americans are misleading ("The Real Economic Scorecard," September 3).  In particular, he's correct that average or median income can stagnate or fall even if everyone's income rises.  Here's how I explain this possibility to my students:

Imagine what the average or median income would be in a room occupied only by Bill Gates, Warren Buffet, and Bono.  Now imagine that I enter the room and accept their offer to become their full-time shoe-shiner at an annual salary of $500,000.  Because this income is higher than I earned before entering the room, I'm richer. And because my entering the room does not lower their annual incomes, none of them is poorer.  But my presence in the room (with my new income still far below that of each of these men) dramatically lowers the room's average income, and pretty significantly lowers its median income, even if the income of each of these men rises during the current year.

Everyone is richer, yet average and median incomes are lower.  As Mr. Samuelson points out, this possibility is not merely academic.

Sincerely,
Donald J. Boudreaux

The Music of the Market

I shamelessly free-ride, in this letter to the New York Times, on an insight about jazz that I learned from Russ:

Jeffrey Lewis nicely recounts the experiment of a band using extreme improvisational methods to write music - no one or two identifiable composers, but participation by all band members ("Communist Songwriting (Sort Of)," August 19).  Mr. Lewis describes the goal: "The songs should never be the recognizable product of one or two minds, but an ineffable, dreamlike synthesis of three or more participants in which the final result was sometimes quite mind-boggling."

Contrary to Mr. Lewis's claim, though, this method of composition has far more in common with the free market than it does with communism.  Communism turned each individual into, at best, a robot with a tightly scripted role in a gigantic central plan.  The communist ideal was planned 'progress'; nothing was to be left to unreliable individual initiative.  Everything was directed, in mind- and soul-numbing detail, from the top.

But in free markets - there the results are truly and marvelously mind-boggling.  Consider the mundane pencil and ask: whose idea was it?  Who planned its production from the raw-material stages (felling trees for the wood, drilling oil for the paint, mining bauxite for the ferrule and graphite for the ‘lead’) through to pencils' delivery to hundreds of thousands of retailers?  The answer is no one.  Pencils - and cars and MP3 players and aspirin and romantic B&Bs and you name it - are each the creative, mind-boggling result, not of any one or two 'composers,' but of the efforts of millions of individuals each doing his or her thing in the feedback-rich environment of markets.

Play on!

Sincerely,
Donald J. Boudreaux

My colleague Tom Hazlett, after reading my letter, e-mailed this nice observation to me:

"... or have folks missed that the corporation provides its 'music' through cooperation in a shared ownership 'commons,' often blasted by critics of capitalism as so smoothly blended to be anti-individualistic? "

I, 'I, Pencil'

Leonard Read's 1958 essay "I, Pencil" is unmatched among all publications in economics in its success at conveying an immense amount of profound wisdom in a style so accessible and charming.  (By the way, near the beginning of The Price of Everything Russ does a superb job of explaining how an economics professor might introduce this wisdom to students.)

My friend Roger Meiners recently created this PowerPoint presentation to accompany his lecture on "I, Pencil."  When Roger sent this presentation to me, he commented that his effort was much easier than Leonard Read's effort of 50 years ago.  "I just used Google to get many of the details and the pictures."

Think about it.  Millions of persons unknown to Roger contributed their skills, knowledge, time, and effort to make it possible for him, in just a few minutes (and at zero marginal pecuniary cost!), to create a PowerPoint presentation that will enable him to deliver a great lecture to his students.  How many people helped to build the computer he worked on?  To construct the cameras that captured the images?  To engineer the PowerPoint software?  To create and maintain search engines on the web?

The answer to each of these questions, and to each of many other similar questions that could be asked about this single, today-very-ordinary task of creating a PowerPoint presentation, is "countless."  In some cases hundreds of thousands of people; in some cases hundreds of millions -- perhaps billions -- of people.

No one knows how to make a PowerPoint presentation.  No one could possibly know all that there is to know about making a PowerPoint presentation.  The creation of such presentations requires the cooperation of uncountably large numbers of people from around the globe.  And yet, like the quotidian pencil, PowerPoint presentations are made and consumed everyday, and at minuscule cost.

That is the power of markets.

The Course of Human Labor in Markets

Russ's new book, of course, is now out; a copy already graces a bookshelf in my home.  But for those of you who haven't yet read Russ's first book -- The Choice -- I urge you to do so ASAP.  It offers the best explanation of trade, and case against protectionism, penned since Bastiat last wrote more than 150 years ago.

A major theme of The Choice is that free trade -- or, more generally, producing any good or service with fewer and fewer resources (including human resources) -- releases resources (again and especially, including human resources) to produce other goods and services that would not otherwise be possible to produce.

And when human resources are released from many of the tasks that demanded it over the years (agriculture, manufacturing), human beings are able to find other occupations that generally are more fulfilling.  Although the span of time over which this emancipating process takes place is long enough to avoid detection and appreciation by those whose observation is only casual, stepping back and looking at our society today in comparison with that of 200 or even 50 years ago makes clear that this process of emancipating human labor from tedium is real and is responsible for much (I would say most) of what is fine and wonderful about our world today.

This comic-book account of robots replacing human labor makes the point.  (HT Ronald Hayden, who found this nice story at ColbyCosh.com)

Bastiatian Wisdom

Cafe patron David Descôteaux has this letter published on Saturday in Montreal's The Gazette:

Looking for help from Bombardier

Letter

Published: Saturday, July 26

I have a project: to publish a book. I have talent and I'm certain it will be a success. I ask each of Bombardier's 70,000 employees to lend me $25. I will repay the entire amount ($1.7 million) in 10 years. Of course, it will be a zero-interest loan. And I will pay you back only if I sell my books. If I sell nothing, you get nothing.

You refuse? But my project will create economic wealth. The publisher will earn a profit, I'll buy writing software, hire a research staff, buy paper, eat at restaurants near my house, hire a contractor to build me a decent office. Add the income tax of all these workers to the taxes generated by the sale of the books, and the government will make a fortune.

Besides, our book industry must be competitive. I heard that a French author, who writes on the same subject as me, receives subsidies from his government. It would be unjust and suicidal for our industry not to subsidize me, too.

You still refuse? You prefer to put your $25 in a safe investment, earning an eight-per-cent compounded annual return that will add up to $54 in 10 years, instead of the uncertain $25 I'm offering you? You say it's more important for you to keep this money for your daughter's college tuition than to use it to make planes? I don't get it.

But it doesn't matter what you think. You have no choice. My good friend the politician will make you lend me the money. If you refuse, he'll send you to jail. He thinks it's a good project. After all, who are you to know what to do with your money?

David Descôteaux
Le Gardeur

(A French version is here.)

Bastiat would be impressed!

Carnival of Contemptibles

Jonah Goldberg's column in today's New York Post is excellent.  Here's a snippet:

Never mind that there's no evidence "speculators" - i.e. commodity traders - are doing anything to increase the price of oil. They aren't hoarding it; no one's cornering the market. The speculators make money when the price goes down, and they make money when it goes up. In short, they don't care if oil prices are high or low as long as they guessed correctly.

That may be the most infuriating part of all this. The speculators don't want high oil prices - but Washington does.

The US government has barred billions of barrels of oil from coming to the market by declaring huge petroleum reserves off-limits to drilling. Uncle Sam stores vast amounts in the Strategic Petroleum Reserve for a rainy day now called "election season." Government drives up pump prices with gas taxes and regulations against increasing refinery capacity.

What's Truly Sick

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

Louise Benson says that allowing people to sell their transplantable body organs would result in poor people being "enticed by the money" to become suppliers; she thinks this outcome would be "sick" (Letters, May 31).  Ignore Dr. Benson's questionable presumption that her personal cultural aesthete should trump the freedom of other adults to make such choices.  Focus instead on the economics.  If organ sales were liberalized, the availability of organs would rise and their prices would fall. Transplant surgery would become more affordable and, thus, more lives - not only of the rich but of all classes - would be improved and saved.

What's truly sick is government's continued prohibition of organ sales.

Sincerely,
Donald J. Boudreaux

By the way, my GMU colleague Lloyd Cohen (who teaches in the law school) writes insightfully about organ donations.  Many of his papers can be found here at his website.

Two Letters on the Market

Today's edition of USA Today published this letter of mine:

Commentary writer Alan Webber applauds the idea of the so-called social business — one that "has a social cause, not just a financial goal." Webber also tells us: "Think of it as capitalism with a human face" ("Giving the poor the business," The Forum, Wednesday).

I don't question Webber's uncritical assumption that social businesses will work.

I do, however, question his hackneyed suggestion that the face of for-profit capitalism is inhuman.

No other economic system but capitalism has lifted billions of people so decisively out of poverty.

Economist Joseph Schumpeter noted this fact in 1942: "Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend them.

"It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to a rich man.

"Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort."

And today's edition of the Baltimore Sun published this one:

Julie Sensat Waldren eloquently explains the difficulties of "being green" ("It's not easy being green," Commentary, May 17).

For example, consumers cannot possibly know how the environmental impact of disposable cups compares with that of ceramic cups whose production consumes lots of energy.

Contrary to a profusion of claims by naive pundits, the economy is far too complex for any person or even a committee of geniuses to trace the full environmental consequences of any of the hundreds of ordinary decisions consumers and producers make daily.

Economists since Adam Smith have taught that the best we can do is to have well-defined property rights that owners use and exchange as each judges best.

The unplanned result isn't an earthly paradise, but it's vastly superior to what emerges when people consciously aim to bring about a specific outcome in the overall pattern of economic activities.

Happy 109th, Fritz!

F.A. Hayek was born on this day in 1899.  To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:

Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.

Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.

Unreasonable Reasonableness

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

Adhering to the general practice of saying that free trade has both winners and losers, you introduce two letters on Nafta with the heading "Nafta Has Helped Some, Hurt Some" (Letters, May 2).  But this familiar endeavor to appear reasonable misleadingly implies that trade across political boundaries has a unique propensity to help some and hurt others.  In fact, any economic change helps some and hurts others.

Would you introduce letters on the polio vaccine with "Vaccine Has Helped Some, Hurt Some"?  After all, the vaccine eliminated jobs for workers who made crutches, wheel chairs, and iron-lung machines.  Of course, the benefits of the vaccine - especially over the long run - far outweigh the costs.  Likewise with consumers' freedom to spend their incomes as they choose.  And free trade is nothing more than consistently allowing consumers to spend their incomes as they choose.

Sincerely,
Donald J. Boudreaux

This earlier post of mine addresses the same point in a slightly different way.

Capitalism Day

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich.  Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism."  Here are the central paragraphs:

Before refrigeration, people ran enormous risks of ingesting deadly bacteria whenever they ate meat or dairy products. Refrigeration has dramatically reduced the bacteria pollution that constantly haunted our pre-twentieth-century forebears.

We wear clean clothes; our ancestors wore foul clothes. Pre-industrial humans had no washers, dryers, or sanitary laundry detergent. Clothes were worn day after day without being washed. And when they were washed, the detergent was often made of urine.

Our bodies today are much cleaner. Sanitary soap is dirt cheap (so to speak), as is clean water from household taps. The result is that, unlike our ancestors, we moderns bathe frequently. Not only was soap a luxury until just a few generations ago, but because nearly all of our pre-industrial ancestors could afford nothing larger than minuscule cottages, there were no bathrooms (and certainly no running water). Baths, when taken, were taken in nearby streams, rivers, or ponds, often the same bodies of water used by the farm animals. Forget about shampoo, clean towels, toothpaste, mouthwash, and toilet tissue.

The interiors of our homes are immaculate compared to the squalid interiors of almost all pre-industrial dwellings. These dwellings’ floors were typically just dirt, which made the farm animals feel right at home when they wintered in the house with humans. Of course, there was no indoor plumbing. Nor were there household disinfectants, save sunlight. Unfortunately, because pre-industrial window panes were too expensive for ordinary families and because screens are an invention of the industrial age, sunlight and fresh air could be let into these cottages only by letting in insects too. Also, bizarre as it sounds to us today, the roofs of these dwellings were polluted with all manner of filthy or dangerous things. Here’s the description by historians Frances and Joseph Gies, in Life in a Medieval Village, of the roofs of pre-industrial cottages:

Roofs were thatched, as from ancient times, with straw, broom or heather, or in marsh country reeds or rushes. . . .  Thatched roofs had formidable drawbacks; they rotted from alternations of wet and dry, and harbored a menagerie of mice, rats, hornets, wasps, spiders, and birds; and above all they caught fire. Yet even in London they prevailed.

Peace and free trade.

I'm Lovin' It!

George Will celebrates a great American institution: McDonald's.  Here's a key paragraph:

McDonald's exemplifies the role of small businesses in Americans' upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants -- average annual sales, $2.2 million -- are owned by franchisees. McDonald's has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.

Future Jobs

The following letter of mine is published in today's edition of the New York Times:

To the Editor:

Bob Herbert quotes the observation by Andrew L. Stern, president of the Service Employees International Union, that Americans today “cannot see where the jobs of the future are that will allow their kids to have a better life than they had.” Mr. Stern adds, “And they’re not wrong.”

But when could Americans of any generation foresee future jobs? Did the blacksmith in 1890 foresee jobs in the auto industry? Did the corner grocer in 1940 foresee his son prospering as a regional manager for Wal-Mart?

Did the telegram-deliverer in 1950 foresee his child designing software for cellphones? Did the local pharmacist in 1960 foresee his daughter’s job as a biomedical engineer?

Our inability today to see the details of the future is no more worrisome than was the same inability of our grandparents. 

Donald J. Boudreaux
Fairfax, Va., Dec. 22, 2007
The writer is chairman of the economics department, George Mason University.

The Case for Increasing Supplies of Petroleum

A few Cafe patrons have, quite reasonably, questioned my claim that it is not at all obvious that we're running out of oil.  The main point common to all of the e-mails that I've received on this matter is that, even though proved reserves of oil are today higher than they were in decades past, the actual, physical amount of oil in the ground must be less than it was back then.  After all, the more oil we use the less oil there must be remaining in the ground.

This fact is almost surely true.  But economically it might be irrelevant.  I reprise below one of my earliest posts here at Cafe Hayek:

Is it Possible that the Quantity of Oil is Practically Infinite?

Don Boudreaux

It seems obvious that we're destined to encounter seriously reduced supplies (and higher prices) of oil.  Even physics professors say so.

But consider a couple of scenarios.

Scenario One: You’re a hungry mosquito on the surface of an enormous balloon. The balloon contains as much blood as an Olympic-size swimming pool contains water. You, hungry mosquito that you are, inject your snoot into the balloon and enjoy a meal. Of course, by doing so you negligibly reduce the volume of blood in the balloon. But whether you know it or not, you can gorge yourself on blood from this balloon for the rest of your life and there will still be far more blood remaining in the balloon at your death than you’ve consumed during your lifetime.

Scenario Two: You’re a hungry mosquito on a balloon the size of child’s marble. You take a meal. The size of your meal relative to the blood-contents of the tiny balloon is large; you significantly reduce the contents.

…..

I don’t know if humanity and its demand for oil is like the mosquito in scenario one, but I’m sure that we are not like the mosquito in scenario two. We might be in some intermediate scenario – say, like a mosquito sitting atop a blood-filled balloon the size of a large beach ball.

But we could be like the mosquito in scenario one. That mosquito needn’t know – probably wouldn’t know – that she’s atop a physical quantity of blood that is practically limitless. If she's told, accurately, that the amount of blood in her balloon is finite, she might worry that she’ll run out of blood, or that she'll drink so much that what eventually remains in the balloon will be too costly for her to suck out; she might persuade herself to drink less blood. Would she be wise to do so?

If scenario #1 is closer to reality -- and the evidence so far is consistent with that possibility -- then the relevant constraint on our getting oil out of the ground is not any scarcity of the physical amount of oil that exists in the ground as much as it is the scarcity of our ingenuity and resources for use in that endeavor.  As this ingenuity and these resources become more abundant -- as their effectiveness in finding and extracting crude oil improves -- the amount of oil available for our use does indeed increase, in a very real way, over time even as we consume more oil.

Cartoons, Capital, and Competition

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I draw an economic lesson from The New Yorker's weekly cartoon-captioning contest, in which people are invited to submit captions to accompany uncaptioned cartoons.  My vanity compels me to quote at length from the heart of the article.

Think of each uncaptioned cartoon as a capital good. It has the potential to create value (in this case, to make readers laugh). By itself, though, this capital good produces almost no value; without a caption, each cartoon is virtually worthless. The cartoon becomes valuable -- it contributes to human satisfaction -- only when a clever caption is added to it.

Suppose for a moment that The New Yorker allowed only residents of Manhattan to submit captions. No doubt many submitted captions, when added to the cartoons, would produce the intended humorous result. But editors of the magazine could not be certain that the best possible caption was submitted.

What if, for a particular cartoon, someone living in Brooklyn had an even better idea for a caption? By prohibiting non-Manhattanites from contributing their caption ideas to the cartoons, the caption that would have been submitted by the person in Brooklyn -- the caption idea that would have added to the cartoon even more value than is added by the best caption from Manhattan -- never is added. Thus, the cartoon -- this particular capital good -- fails to produce as much value as it would have produced had Brooklynites been among those who were permitted to submit captions.

Sadly, though, no one ever learns this fact. The winning caption submitted from Manhattan might be judged by everyone to be excellent. But because the even better caption from Brooklyn never materializes, no one ever discovers just how funny that cartoon could be.

If the goal is to ensure maximum value of this particular capital good (a weekly uncaptioned cartoon), clearly it is advisable to have larger, rather than smaller, numbers of people able to try their minds at devising clever captions. With everyone in the world free to contribute captions, each cartoon is joined with cleverer and more creative captions than would be the case if only Manhattanites -- or only residents of New York state, or even only Americans -- were allowed to submit captions.

The very same process is true of factories and machines and workers. It might be that the entrepreneur with the best idea for how to use a particular factory and its machines and workers to produce maximum value is an American. But fewer than 5 percent of the world's people live in America. So it is inevitable that the best and most creative ideas for how to use particular assets that are located in America will often be possessed by non-Americans.