October 7, 2015

The enigma of the Trans-Pacific Partnership

Filed under: Economics — Tags: , , , , — Nicholas @ 05:00

We don’t know what’s in it, so it could be a multi-national version of “we have to pass it to find out what’s in it”. Megan McArdle manages to raise one cheer for the agreement:

I’ve spent the morning reading about the Trans-Pacific Partnership. I went in prepared to deliver a column full of details, winners and losers, strong opinions about the good provisions and the bad. But what really comes to mind is a dismal thought: “Is this the best we can do?”

Oh, yes, I know the statistics. Forty percent of the world’s economy. Thousands of tariffs falling. I know the opposition points too, about giveaways to business, intellectual property rules, outsourcing jobs. No one is talking about the larger story, though, which is that the biggest trade news in a decade involves a regional deal of relatively limited impact.

It was not always thus. When I was a fledgling journalist, a wee slip of a thing, we economics writers looked to major global trade negotiations to advance the cause of freer markets, and not incidentally, the material progress of mankind. We looked down on regional side-deals because they were such weak tea compared with the robust brew of a global agreement. Regional deals distorted the flow of trade, encouraging people not to exploit comparative advantage and production capabilities, but rather to seek the best combination of tariff rules from among competing regional frameworks. I have heard arguments that such deals, by distorting trade and weakening the pressure to make global deals, were actually worse than doing nothing. Indeed, I may have made such arguments.

You don’t hear those arguments any more, and that’s because we free-traders have largely given up on global trade agreements. The Doha round of World Trade Organization talks collapsed in the face of European agricultural protectionism and intransigence among countries with large numbers of subsistence farmers. Nativism, protectionism, nationalism seem to be rising as a political force in many countries. Global trade volumes are looking anemic. In this climate, regional agreements seem attractive, in much the same way that the remaining bar patrons assume a winsome glow around closing time.

How have things come to such an unpretty pass?

A Deeper Look at Tradeable Allowances

Filed under: Economics, Environment — Tags: , , , , — Nicholas @ 03:00

Published on 18 Mar 2015

Since the passage of the Clean Air Act, SO2 emissions have decreased by 35%. Part of this is due to tradable allowances, which created a market solution to the external costs of SO2 emissions. In this video, we look at the lessons of tradable allowances for SO2 and see if a similar market-based solution could work to decrease other pollutants, such as CO2.

October 6, 2015

Puerto Rico’s minimum wage experiment

Filed under: Economics, USA — Tags: , , — Nicholas @ 03:00

J.R. Ireland describes what happened to Puerto Rico’s economy when the minimum wage was raised to the mainland level by congress in 1974:

Prior to 1974, Puerto Rico had its own minimum wage and was not tethered to the general American wage. Then, in their infinite wisdom, the US Congress decided to normalize the minimum wage across all US territories and passed legislation making Puerto Rico’s minimum wage the same as the American wage had always been.

Well what happened next, you might ask? The economy imploded. Puerto Rico had an unemployment rate around 12% and an employment to population ratio of approximately 78% pretty much continuously between 1960 and 1974. The numbers had gone up a bit — they had come down a bit — but overall, year in and year out, you could look at Puerto Rico and be sure that the unemployment rate would be between 10 and 14 percent and the employment to population ration would be between 75 and 80 percent. You could set your watch by this kind of consistency.

Then Puerto Rico’s minimum wage was raised substantially beginning in 1974. The Puerto Rican unemployment rate then proceeded to increase for four consecutive years until it peaked at 20%. It roughly plateaued for half a decade or so, and then it went up again until Puerto Rico had an unemployment rate of 25% by 1984. Meanwhile, the employment to population ratio fell from 78% to 60% and has never recovered.

It is not just me pointing out the absolutely catastrophic consequences of the minimum wage increase in Puerto Rico — the National Bureau on Economic Research agrees. According to them:

    Imposing the U.S.-level minimum reduced total island employment by 8-10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States. In addition, it reallocated labor across industries, greatly reducing jobs in low-wage sectors that had to raise minima substantially to reach federal levels. (3) Migrants from Puerto Rico to the United States are drawn largely from persons jobless on the island, with characteristics that make them liable to have been disemployed by the minimum wage. As the Puerto Rican minimum rose toward U.S. levels, the education of migrants fell below that of nonmigrants. (4) Migration was critical in allowing Puerto Rico to institute U.S.-level minimum wages and played a major role in the long term growth of real earnings in Puerto Rico by reducing the labor supply and raising the average qualifications of workers on the island.

In other words, the minimum wage increase caused massive unemployment, forced hundreds of thousands of unemployed Puerto Ricans to flee the island because there were no jobs, and the only reason the entire territory wasn’t rendered destitute is because the poorest Puerto Ricans all moved to Chicago or New York rather than choosing to remain unemployed on the island itself.

October 5, 2015

Trading Pollution: How Pollution Permits Paradoxically Reduce Emissions

Filed under: Economics, Environment, Government — Tags: , , — Nicholas @ 04:00

Published on 18 Mar 2015

In an effort to reduce pollution, the government tried two policy prescriptions under the Clean Air Act Amendments of 1990. The first — command and control—mandated that each power plant lower its pollution by a determined amount. However, different firms face different cost curves and, because information is dispersed, policymakers don’t always know those costs. The second policy prescription — tradable pollution permits — empowered firms to use knowledge of their cost curves to buy or sell pollution permits as needed. Under this policy, the invisible hand of the market helped discover the lowest cost way of reducing pollution.

Much of the recycling you do is sheer wasted effort – or even worse

Filed under: Economics, Environment, USA — Tags: , — Nicholas @ 02:00

Everyone is in favour of recycling, right? It’s good for the earth, it’s good for the economy, it’s good for everyone! Except, as John Tierney points out, that’s pretty much all nonsense:

If you live in the United States, you probably do some form of recycling. It’s likely that you separate paper from plastic and glass and metal. You rinse the bottles and cans, and you might put food scraps in a container destined for a composting facility. As you sort everything into the right bins, you probably assume that recycling is helping your community and protecting the environment. But is it? Are you in fact wasting your time?

In 1996, I wrote a long article for The New York Times Magazine arguing that the recycling process as we carried it out was wasteful. I presented plenty of evidence that recycling was costly and ineffectual, but its defenders said that it was unfair to rush to judgment. Noting that the modern recycling movement had really just begun just a few years earlier, they predicted it would flourish as the industry matured and the public learned how to recycle properly.

So, what’s happened since then? While it’s true that the recycling message has reached more people than ever, when it comes to the bottom line, both economically and environmentally, not much has changed at all.

Despite decades of exhortations and mandates, it’s still typically more expensive for municipalities to recycle household waste than to send it to a landfill. Prices for recyclable materials have plummeted because of lower oil prices and reduced demand for them overseas. The slump has forced some recycling companies to shut plants and cancel plans for new technologies. The mood is so gloomy that one industry veteran tried to cheer up her colleagues this summer with an article in a trade journal titled, “Recycling Is Not Dead!


The future for recycling looks even worse. As cities move beyond recycling paper and metals, and into glass, food scraps and assorted plastics, the costs rise sharply while the environmental benefits decline and sometimes vanish. “If you believe recycling is good for the planet and that we need to do more of it, then there’s a crisis to confront,” says David P. Steiner, the chief executive officer of Waste Management, the largest recycler of household trash in the United States. “Trying to turn garbage into gold costs a lot more than expected. We need to ask ourselves: What is the goal here?”

October 2, 2015

An Orgy of Innovation (Everyday Economics 5/7)

Filed under: Economics — Tags: , , — Nicholas @ 03:00

Published on 20 Apr 2015

The list of famous inventions from the last few centuries is long, and you may even be making use of one right now — laptops, smartphones, tablets, and televisions, for instance. There are countless unsung improvements, too, that make our daily lives much easier. We’ve all benefited from zip top sandwich bags, twist bottle caps, and long-lasting batteries, to name a few!

The economic historian Deirdre McCloskey coined the term “innovationism” to describe the phenomenal rise in innovation over the past couple hundred years. While there have always been inventors and innovators, that number exploded after the eighteenth century, contributing to what we’ve described in previous videos as the “Hockey Stick of Human Prosperity.”

Why has innovation grown so rapidly? Economist Douglass North argues it has to do with institutions such as property rights, non-corrupt courts, and rule of law, which lay the foundation for innovation to take place. Others attribute the rise to factors such as education or access to reliable energy. McCloskey argues that what really kicked innovation into high gear is a change in attitude — ordinary people who once celebrated conquerers and kings began to celebrate merchants and inventors.

In this video, we discuss these ideas further. After all, a better understanding of what drives innovation could help poor countries that still live on the handle of the “Hockey Stick” reach a much greater level of prosperity.

October 1, 2015

US tax cut proposals fail the laugh test

Filed under: Economics, Government, Politics, USA — Tags: , , , — Nicholas @ 05:00

At Ace of Spades H.Q., Ace responds to a recent Kevin Williamson post:

It is standard conservative theory that tax cuts and spending cuts go hand in hand. But after decades of ever-rising spending, coupled with occasional tax cuts, I’m not so certain of that any longer.

I believe it was after Reagan that Republican theorists began justifying his model of tax-cuts-now-spending-cuts-later as the “starve the beast” theory of limiting government — if we cut taxes, therefore cutting government’s resources, we should, logically, force the government to adapt itself to living with fewer taxpayer dollars. Ergo, spending should be forced down by the practicalities of the situation — either you start cutting spending, or else you start running up dangerous, Greece-level of debts.

The problem is that this country has always elected the “or else” part of this syllogism: We are racking up dangerous, Greece-levels of debts, and we’re barely even talking about that any longer.

The problem has grown so immense that we’ve decided to declare it officially a Non-Problem. (It will decide to re-assert itself as a Really Big Problem in a short period of time.)

So I no longer believe in the “starve the beast” theory, because the “starve the beast” theory relies upon Americans understanding the mid-to-longer term trajectory of their spending choices, which they plainly do not.

Since Americans are not capable of understanding the mid-to-longer term trajectory of their spending choices, it seems to me the only way to impose budget discipline and spending rollback is to offer Americans an immediate, as opposed to future, confrontation with reality: that is, if Americans wish to have so much government, they should be forced to pay for the level of government they are choosing, and not defer that payment (as they apparently will choose, every single time) into the future, to be imposed upon their children.

But, instead, they must be forced to reckon with the level of government they are choosing now by paying the full freight and cost of that government now.

That is to say: I believe that rolling back spending is only possible when Americans are made to feel the costs of the government they’re choosing, and that will only happen when they’re forced to actually pay for it.

The biggest hurdle, after the economic illiteracy of the voting public, is the starkly clear self-interest of the politicians: they can get re-elected only if they pander sufficiently to the voters. The voters, who do not understand how the government works (and refuse to believe it when you tell them) … want ever-more of it to benefit them as soon as possible. Telling the voters that you’ll not only not give them more but that you’ll be giving them significantly less is a great way to lose your next election (assuming you don’t get thrown out of office before that even comes up).

“Siege economics”

Filed under: Britain, Economics, History — Tags: , , , , — Nicholas @ 04:00

Paul T. Horgan explains why socialist politicians love “siege economics”:

Labour loves siege economies, really adores them. It allows full throated socialism to operate, enabling properly-selected and correctly-motivated state officials to mediate on every commercial transaction between individuals and entities, all in the name of necessity. This is Pitt’s ‘creed of slaves’, using controls to dictate how much can be sold to whom and if it can be sold at all.

Socialists love these economic dictatorships where the function of money as a storage of value and provider of price information is destroyed, where maximum wages and profits are imposed through penal taxation. State ownership of commerce is a given.

Socialists swoon at the thought of regulating demand by rationing supplies to all but a favoured few; it means there is no need for an economic strategy. No need for an interest rate policy if no amount of borrowed money can buy anything. Official inflation is perpetually low when prices are under statutory regulation, despite the inevitable shortages and consequent rise of the black market and the crime of hoarding newly-scarce everyday goods, which requires more Peoples’ Commissars to detect and punish.

Ordinary people who are forced to commit economic crimes just for everyday survival are easier to dominate as their guilt promotes a constant fear of the State and denunciation by their neighbours and friends. Control a person’s economics and you control the person, and socialism is all about the control. And Labour loves to run people’s lives by occupying the commanding heights of the economy to maximise dependency and promote clientelism in the electorate.

This explains why Labour were in their element when Churchill left Atlee, Morrison and Bevin to run the civilian economy while Britain’s greatest warlord used all his energies to create and focus a a domestic military machine and a global coalition to destroy fascism. It is ironic, given modern socialist rhetoric, that the greatest anti-fascist in human history was a Conservative. Perhaps leftists still feel guilt over their fellow travellers’ 1930s pacifism.

September 30, 2015

The Coase Theorem

Filed under: Economics — Tags: , , , , — Nicholas @ 03:00

Published on 18 Mar 2015

In this video, we show how bees and pollination demonstrate the Coase Theorem in action: when transaction costs are low and property rights are clearly defined, private arrangements ensure that the market works even when there are externalities. Under these conditions, the market properly manages externalities.

September 27, 2015

If the Pope actually cares about the world’s poorest, he should embrace capitalism

Filed under: Economics, Religion — Tags: , , — Nicholas @ 03:00

His Holiness the Pope would do far better for the remaining billion truly poor people on the planet if he ignored the blandishments of the anti-capitalists and looked at the actual track record of free enterprise in the developing world:

He has been called the “slum pope” and “a pope for the poor.” And indeed, it’s true that Pope Francis, leader to 1.3 billion Roman Catholics, speaks often of those in need. He’s described the amount of poverty and inequality in the world as “a scandal” and implored the Church to fight what he sees as a “culture of exclusion.”

Yet even as he calls for greater concern for the marginalized, he broadly and cavalierly condemns the market-driven economic development that has lifted a billion people out of extreme poverty within the lifetime of the typical millennial. A lack of understanding of even basic economic concepts has led one of the most influential and beloved human beings on the planet to decry free enterprise, opine that private property rights must not be treated as “inviolable,” hold up as the ideal “cooperatives of small producers” over “economies of scale,” accuse the Western world of “scandalous level[s] of consumption,” and assert that we need “to think of containing growth by setting some reasonable limits.”

Given his vast influence, which extends far beyond practicing Catholics, this type of rhetoric is deeply troubling. It’s impossible to know how much of an impact his words are having on concrete policy decisions — but it’s implausible to deny that when he calls for regulating and constraining the free markets and economic growth that alleviate truly crushing poverty, the world is listening. As a libertarian who is also a devout Roman Catholic, I’m afraid as well that statements like these from Pope Francis reinforce the mistaken notion that libertarianism and religion are fundamentally incompatible.

There’s no question that the pope at times seems downright hostile to much of what market-loving Catholics believe. In this summer’s lauded-by-the-press environmental encyclical Laudato Si (from which the quotes in the second paragraph were drawn), Pope Francis wrote that people who trust the invisible hand suffer from the same mindset that leads to slavery and “the sexual exploitation of children.” In Evangelii Gaudium, his 2013 apostolic exhortation, he chastised those who “continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.”

Even more frustratingly, he asserted that such a belief in free markets “has never been confirmed by the facts.” Worse still, this year he stated in an interview: “I recognize that globalization has helped many people to lift themselves out of poverty, but it has condemned many other people to starve. It is true that in absolute terms the world’s wealth has grown, but inequality and poverty have arisen.” Globalization has caused poverty to “arise” and “condemned…many people to starve”?

A man Politico described as insisting “reality comes before theory” could not be more mistaken about the empirical truth of capitalism’s role in our world. While income inequality within developed countries may be growing, the income gap between the First World and the rest of the world is decreasing fast. As the World Bank’s Branko Milanovic has documented, we are in the midst of “the first decline in global inequality between world citizens since the Industrial Revolution.” In 1960, notes the Cato Institute’s Marian Tupy, the average America earned 11 times more than the average resident of Asia. Today, Americans make 4.8 times as much. “The narrowing of the income gap,” Tupy found, “is a result of growing incomes in the rest of the world,” not a decline in incomes in developed nations.

September 25, 2015

An economic theory of avant garde and popular art

Filed under: Economics, History, Media — Tags: , , — Nicholas @ 03:00

Published on 3 Sep 2015

When do artists sell out and when do they keep their artistic integrity?

Reducing income inequality

Filed under: Bureaucracy, Business, Economics, USA — Tags: , , , , — Nicholas @ 02:00

Tim Worstall in Forbes:

There’s a fascinating and very long essay over in National Affairs about how we might cut income inequality. And, contrary to what any number of Democratic candidates for office will tell you, the answer isn’t to impose ever more regulation upon the economy. Rather, it’s to strip away some of the regulation that allows certain favoured income groups to make excessive incomes. Excessive here defined as greater than the economic value they add to the lives of the rest of us, something they achieve by carving out economic rents for themselves. I would, myself, go rather further than the writer, Steven Teves, and start using Mancur Olson’s analysis, that this is what democratic (note, democratic, not Democratic) politics always devolves down into, a carving up of the public sphere to favour certain interest groups. But even this milder version gives us more than just hints about what we should be doing:

    At the same time, however, we have seen an explosion in regulations that shower benefits on the very top of the income distribution. Economists call these “rents,” which we can define for simplicity’s sake as legal barriers to entry or other market distortions created by the state that create excess profits for market incumbents.

Let us take one very simple example of such rents. The earnings of those who possess taxi medallions in cities where there’s an insufficient number issued. Until very recently one such medallion, allowing one single cab to operate on the streets of NYC 24/7, had a capital value of $1 million. That led to a rent, a pure economic rent, of $40,000 a year to allow one cab river to use that medallion for 12 hours of the day. and, obviously, another $40,000 to allow another to use it for another 12 hours a day.

That is purely a rent: and one created by New York City not issuing enough medallions to cover the demand for cab services. Uber has of course exploded into this market and the success of that company, along with its many competitors, shows how pervasive the creation of such rents by limiting taxi numbers has been in cities around the world. That is an obvious and very clear creation of a rent purely through bureaucratic action.


Deregulating the economy will remove many of those rents. This will reduce income inequality. So, why aren’t those who rail against income inequality shouting for deregulation? Good question and the only proper answers become increasingly cynical. Unions exist for the purpose of creating rents for their members. So, given the union participation in the Democratic Party we’re not going to see calls for deregulation from that side. And different groups, those car dealers perhaps, the doctors, have their hooks into the Republican Party too.

My own answer is that it needs to be done in the same manner that Reagan treated the tax code. Not that I’m particularly stating that Reagan’s tax changes were quite as wondrous as some now think they were, only that it all had to be approached on a Big Bang basis. Everything had to be on the table at the same time so that while there were indeed those who would defend their little corner the over riding interest of all was that all such little corners got eradicated. With this rent creation, given that so much of it is at State level, that won’t really work. Except for one idea that I’ve floated before.

September 24, 2015

A case study – Nik-Mart in Subsistia

Filed under: Economics, USA — Tags: , , , , — Nicholas @ 03:00

Don Boudreaux looks at the different effects of international aid and capitalist exploitation in a desperately poor, far-away country:

The far-away land of Subsistia is inhabited by people who are desperately poor, not only relative to the typical person elsewhere on the globe but also in absolute terms. For decades well-meaning, well-educated, and well-funded people from the United States and other wealthy countries have visited Subsistia to help raise Subsistians out of poverty.

Alas, while these efforts by governments, NGOs, and churches have been many and munificent, all ordinary Subsistians continue to live in deep poverty – that is, until recently. A few short years ago a large U.S. corporation, Nik-Mart, set up factories in Subsistia. The wages that Nik-Mart pays to its Subsistian workers, while much higher than the average wage in Subsistia, are only a tiny fraction of the wages that Nik-Mart pays to its production-line employees in America.

Nik-Mart sells the goods produced in its Subsistian factories all around the world. One result of Nik-Mart’s operations in Subsistia is that the real prices that poor Americans and Europeans pay for shoes, clothing, and home furnishings have fallen significantly.

Nik-Mart is consistently one of the world’s most profitable corporations. It is also one of the world’s most hated.

When word recently leaked out of Nik-Mart’s record sales revenues and of the healthy rate of return on Nik-Mart’s assets, protests erupted in all major capitals of the developed world. Washington, Ottawa, Santiago, London, Amsterdam, Stockholm, Paris, Berlin, Madrid, Rome, Prague, Moscow, Tokyo, Pretoria, Canberra – these and other cities were swarmed by protestors demanding “social justice” and criticizing Nik-Mart for exploiting workers. “Nik-Mart’s profits are in the billions,” screamed U.S. Sen. Elsbeth Walter, who gave a rousing speech to protestors on the Washington Mall, “and yet it exploits poor workers in Subsistia while it off-shores jobs from America, hurting poor Americans! Have you no shame, Nik-Mart? Have! You! No! Shame?!!” Sen. Walter rhetorically asked, her index finger pointing accusingly at an imaginary Nik-Mart executive presumably hovering, phantasmically yet bloatedly, before her.

The Sunday talking-head shows were filled with heads talking of little else. “It’s really unconscionable,” said Harmon Nicholson, a famous progressive columnist, “that Nik-Mart takes advantage of the freedom that this country gives it to produce the things it sells in America outside of America. It’s no wonder our jobs picture is so weak and that American wages have stagnated.”

Sen. Lawrence Greenham, a Republican from the south, chimed in: “I don’t normally agree with Harmon, but he’s right on this. American plutocrats are gettin’ richer an’ richer off the backs of America’s poor. It’s gotta stop.”

September 23, 2015

Comparative Advantage and the Tragedy of Tasmania (Everyday Economics 4/7)

Filed under: Economics, History — Tags: , , , , — Nicholas @ 03:00

Published on 24 Jun 2014

What can a small, isolated island economy teach the rest of the world about the nature and causes of the wealth of nations? When Tasmania was cut off from mainland Australia, it experienced the miracle of growth in reverse, as the reduction in trade and human cooperation forced its inhabitants back to the most basic ways of living. In an economy with a greater number of participants trading goods and services, however, there are more ways to find a comparative advantage and earn more by creating the most value for others. Let’s join Bob and Ann as they teach us the “Story of Comparative Advantage” like you’ve never seen it before.

New libertarian books of interest

Filed under: Economics, Law — Tags: , , — Nicholas @ 02:00

In the Washington Post, Ilya Somin draws attention to two new books of interest to libertarians:

Two exciting new books have just come out that are likely to be of great interest to readers interested in libertarianism, and political and legal theory. They are Markets Without Limits: Moral Virtues and Commercial Interests, by Jason Brennan and Peter Jaworski, and Justice at a Distance: Extending Freedom Globally, by Loren Lomasky and Fernando Teson. As the titles imply, both books have a libertarian orientation. But you don’t have to be a libertarian (or close to it) to agree with the authors’ positions on these issues, and even those interested readers who ultimately reject the authors’ conclusions can learn a lot from them.

In Markets Without Limits, Brennan and Jaworski argue that anything you should be allowed to do for free, you should also be allowed to do for money. They do not claim that markets should be completely unconstrained, merely that we should not ban any otherwise permissible transaction solely because money has been exchanged. Thus, for example, they agree that murder for hire should be illegal. But only because it should also be illegal to commit murder for free. Their thesis is also potentially compatible with a wide range of regulations of various markets to prevent fraud, deception, and the like. Nonetheless, their thesis is both radical and important. The world is filled with policies that ban selling of goods and services that can nonetheless be given away for free. Consider such cases as bans on organ markets, prostitution, and ticket-scalping. Perhaps the most notable aspects of the book are that the authors don’t shy away from hard cases (see, e.g., this summary of their discussion of the sale of adoption rights), and that they thoroughly address a wide range of possible objections from both left and right. The issue addressed by the book has enormous practical significance, in addition to its theoretical importance. To take just one example, the ban on organ markets condemns thousands of people to death every year, because it leads to a severe shortage of transplantable kidneys relative to the number of people who need them.

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