All protectionism is rooted in the mistaken presumption not only that existing, domestic producers have a moral right – enforceable by the state – to the patronage of domestic consumers, but also that no future domestic producers have such a right as against current domestic producers. This right, were it real, implies that consumers exist to please existing domestic producers; it implies that continued or expanded production of that which is currently produced domestically is the end, while consumption is only the means of encouraging such production.
Only the widespread, if unthinking, acceptance of this presumption gives credence to the demands of domestic producers that some “unfair” practice by a foreign rival or foreign government justifies the imposition by the home government of punitive taxes on domestic consumers who purchase imports. Only a widely shared, if seldom articulated, belief that current domestic producers have a right to some minimum portion of domestic-consumers’ incomes explains the nodding of the heads of many people of all political persuasions when they hear some politician or pundit or preacher demonize foreign producers for selling wares to domestic citizens.
Don Boudreaux, “Protectionism”, Cafe Hayek, 2016-05-27.
January 28, 2018
QotD: Protectionism
January 27, 2018
Econ Duel: Rent or Buy?
Marginal Revolution University
Published on 13 Sep 2016Owning a home is a huge part of the American Dream. But is the dream of home ownership really all it’s cracked up to be?
In this new Econ Duel from Marginal Revolution University, Professors Tyler Cowen and Alex Tabarrok weigh in on the issue. Each representing a side of the home ownership debate, the two professors ask what’s smarter — to rent, or to buy?
On the “buy” side, Tyler Cowen shares the tax advantages of buying a home as well as the effect home ownership has on one’s stability and savings regimen. Does buying a home force us into better savings habits?
Against those arguments, we have Alex Tabarrok, coming down on the “rent” side of the equation.
Among other points, he talks about the real beneficiary of tax breaks (hint: It may not be you!). Along with that, Alex tackles the trials and tribulations of home-buying, in places like San Francisco, New York, or Boston, where a combination of scarce building permits and increased demand drive up home prices. Plus, doesn’t owning a home — and committing a 20% down payment — break the diversification rule of good investing?
All that said, though, here’s the real question that matters — which side are YOU on? Watch and let us know in the comments!
January 24, 2018
QotD: What is a human life worth?
Government itself has this problem too in fact and the method generally used to deal with it is price mechanism. We generally try to work out what is the statistical value of a life by looking around at what people do and how much they charge for the risk. Some people work in more dangerous jobs (trawlerman, lumberjack), so what’s the difference in wages between a more dangerous and less dangerous job (trying, of course, to keep other things like effort, training and so on constant)? People smoke and are willing to pay some sum for a safer car but not an unlimited amount. This process is more of an art than a science, but the U.S. government comes up with numbers in the $4 million to $10 million range for the value of a statistical life.
This is not what a life should be worth. This is what, from observation of what people do, modern Americans think a life actually is worth. Now we can use it to decide on our safety regulations. And it doesn’t matter whether we’re talking about corporations eyeing their profits or government aiding the EPA in setting rules about what corporations may do. We still end up with the same economic point.
If the statistical value of a life is $10 million then a rule, a regulation, a new way of doing something, which costs more than $10 million per life saved is a waste of resources. It’s not just something we might have to think about doing: it’s something that we positively should not do. Equally, something that costs less than $10 million per life saved is something we should do. Either way, we are trying to make sure that we expend our limited and scarce resources in order to produce the greatest human value we can. Spending $20 million on saving one life is a waste of those resources: not spending $500,000 on saving one is a waste of that life which we value more.
Tim Worstall, “Sorry, Salon: The Koch Brothers Are Actually Right”, Forbes, 2016-05-17.
January 23, 2018
The unintended consequences of Ontario’s steep minimum wage hike
Colby Cosh on the unpredictable outcomes of Ontario’s recent minimum wage increase:
In Thursday’s edition of this paper, Marni Soupcoff wrote an entertaining column about how Ontario’s fairly aggressive minimum wage increase had suddenly raised the costs of labour-intensive goods and services for consumers — the ones, that is, who don’t benefit themselves from a minimum wage increase. Child care, which is a very pure purchase of labour, is the example that is being exasperatedly discussed this week. The headline did not have “duh” in it, but that was the spirit of the thing.
Soupcoff pointed out that this not only could have been foreseen; an explicit warning of it was given in the pages of the Toronto Star, by the paper’s social justice reporter Laurie Monsebraaten. Our Financial Post section could perhaps easily be called the Social Injustice Gazette, but anyone at FP who got such an early jump on an economics story would be rightly pleased with himself.
Soupcoff’s major point was that the broad-sense law of supply and demand is not some plutocratic swindle devised by the Monopoly Man and his fatcat pals; even believers in “social justice” have to take it into account, as they take gravity into account when they are moving an old couch to a charity shop or sending cosmonauts into orbit. This is obviously right as far as it goes, but the words “supply and demand” are not enough, on their own, to predict the precise market response to a change in a price control — which is what the minimum wage is.
That, perhaps, is the true key point amidst all the various ideological struggles currently in progress over minimum wage levels, which are being yoinked upward in Alberta as well as in Ontario. A minimum wage is a price control. The minimum wage is not really so much a labour standard as it is the abolition of labour bargains that feature a nominal wage below the minimum. And price controls are a blunt instrument. Most economists, whatever their political orientation, instinctively resist them.
The incidence of a price control — the precise place upon which the economic burden of it falls — is not, in fact, foreseeable without other information. In the market for hired child care, for example, it could turn out, with time, that the real effect of increasing a minimum wage is that some parents drop out of the labour market and tend to their own children. It’s just not what one would actually predict, because the need for professional child care is something that a family tends to plan for well in advance, with a longer time horizon than any government’s. (Also, we haven’t invented dependable babysitting robots yet.)
Women, in particular, organize lives and careers around whether they expect their own labour force participation to be able to cover care expenses. Indeed, couples adjust family size for these expectations. We can even imagine circumstances in which a province’s extreme, credible commitment to a very high future minimum wage influenced birth rates.
January 22, 2018
QotD: Expecting far too much from Economics 101
James Kwak is the latest to take up the point that Economics 101 isn’t all that good as a basis for designing public policy. To which the answer is, well, yes, of course. Why is anyone in the least bit surprised at this? We don’t use people with two semesters of college French as translators either. Introductory college courses are introductory college courses: that they provide an introduction to a subject and not full access to the deeper secrets of the profession is a surprise to whom? Well, obviously, apparently some rather large number of people but why there’s all this pearl clutching over it being true about economics and economics only is the mystery I suppose
[…]
What worries me far more about this discussion is this. Sure, it’s entirely obvious that we shouldn’t be designing public policy on the basis of what econ 101 tells us. But all too many people take that to mean that we should be designing public policy in entire violation of what econ 101 tells us. That the introductory course is not complete, does not contain all of the subtlety of all of the arguments is entirely true. But that doesn’t mean that those basic concepts are wrong, nor that they should be tossed on the bonfire of political wishes either. And that, sadly, is what all too many do. We see it all the time: econ 101 isn’t complete therefore the minimum wage doesn’t cost jobs. Econ 101 isn’t everything so therefore trade is a bad idea. As economists agree econ 101 doesn’t describe everything therefore my pet idea in violation of basic principles is right.
That to me is where the danger is: not that people are incorrect in agreeing that there’s more to it than just that introductory class, but that people incorrectly assume that because that is so they can reject what that first class is telling us about the basic of the subject.
Tim Worstall, “Yes, Of Course Economics 101 Is Useless At Designing Public Policy”, Forbes, 2016-05-14.
January 15, 2018
The postwar “international order”
Niall Ferguson on the notion of a post-1945 international liberal order:
The phrase international order reminds me of the phrase Western civilization. As Indian independence icon Mahatma Gandhi wittily replied when asked about Western civilization, “It would be a good idea.” The notion that international order exists or has ever existed seems highly questionable to me. The notion of a liberal international order is even more questionable because it is neither liberal, nor international, nor very orderly.
It is often claimed by political scientists that the liberal international order came into existence in 1945. The argument goes that American and British statesmen, having learned from the terrible mistakes of the 1930s and 1940s, decided to make the world anew by creating a series of remarkable international institutions: the United Nations, the International Monetary Fund and later the World Bank. According to this narrative, Donald Trump’s election as US president in 2016 was a wrecking ball directed at the liberal international order created by the generation of 1945.
Yet this is a fairy tale. For one thing, there was nothing very liberal about the economic order that was established in 1945. It was devised by people – notably John Maynard Keynes – who had repudiated classical liberal economics and believed that international trade should be limited and capital movements controlled.
It was also not a truly international order. After 1945, it very quickly became a bipolar order that divided the world. There was nothing international about the Cold War. It was a battle between two empires and two ideologies, and the rest of the world’s nations had to choose sides.
In short, the notion of a liberal international order, born in 1945, is a historical fantasy. The reality is that it was only in 1991 when the Soviet Union collapsed and the Cold War ended that it was possible to create a liberal international order. The era of truly free trade, truly free capital flows and large-scale migration across borders did not begin until the 1990s.
January 13, 2018
The common factor of the Net Neutrality fight and the EpiPen price gouging scandal
Lili Carneglia explains what these two examples of “capitalist excess” are actually the result of regulatory failures:
Without net neutrality, regulations that prevent internet service providers (ISPs) from charging more for priority speeds and higher bandwidth-use sites would disappear. Most Americans are pretty confused by the revised rules but highly skeptical that this action could have any benefits. Many people, especially those living in the rural south where choices are limited, feel like these companies have been taking advantage of their customers for years, and loosening regulatory constraints on these companies seems like a terrible idea.
Net neutrality was a regulatory policy set under the Obama administration in 2015 that mandated ISPs to treat the internet like other utilities, such as highways and railroads, under laws established before most people had TVs. Under these rules, companies must act as neutral gateways to the internet without controlling the content or the speed of the content that passes through that gateway. Supporters of the rule argue that these regulations ensure the free flow of information, while those against the policy see net neutrality as a misapplication that stifles an industry that is more dynamic than other public utilities.
[…]
Yes, a handful of industry giants can and have abused their market power. Most consumers have limited ISPs to choose from in a given area, and options are more limited outside of big cities, where “three-quarters of American homes have no competitive choice for the essential infrastructure for 21st-century economics and democracy,” according to the former FCC chairman Tom Wheeler. It is important to consider how these circumstances came about before deciding that federal regulation might help consumers.
Governments, by and large, prefer to have fewer players in a given market as it makes that market easier to regulate, and the easiest market to regulate is a monopoly. When cable networks were beginning to spread across North America, many local governments were persuaded that a single cable provider would be the best option for their jurisdiction and the broadband internet market that came later was heavily shaped by the already carved-up markets for cable TV. For many, there were no competitive options because the local government had precluded the chance of competition for their already entrenched cable monopoly (or, in a few cases, tight oligopoly).
Competition is the best answer to monopolistic abuse of customers … if you get shitty service from the Blue Cable Company, you’ll be more likely to switch to the Red Cable Company. If you only have Red and Blue to choose from, your leverage is small, but if you have a full rainbow of competing options, Red and Blue are forced to make their services at least comparable to what Orange and Pink and Magenta are offering, or they lose too many customers. If there’s no threat of a competitor scooping up unhappy customers, there’s no incentive for the existing company to do more than the absolute minimum to keep customer complaints down to a dull roar. The customer’s only recourse — other than giving up the service or moving to a different jurisdiction — is to complain to the regulator.
The base problem with Mylan’s EpiPen price gouging is the same: an effective monopoly supported by the government:
The arguments against net neutrality repeals center around fears about what producers will do without regulation since they have significant market power and the ability to raise prices to levels that would not be sustainable under more competitive conditions. The concern about increased internet prices is similar to what happened in 2016 when a pharmaceutical company with market power, Mylan, increased the price of life-saving EpiPens by about 400 percent.
The “greedy” pharmaceutical companies were hung out to dry as Congress berated Mylan representatives in hearing after hearing. There were similar cries of outrage and demands that the federal government do something to prevent such selfish price-gouging, similar to what many consumers fear ISPs will do absent regulations.
Even (supposed) free-market advocates started supporting further regulation during the EpiPen debate. Most notably, then fiscal hawk representative and now Trump budget director Mick Mulvaney, defended further market intervention on the condition that, “If you want to come to the state capitols and lobby us to make us buy your stuff, this is what you get. You get a level of scrutiny and a level of treatment that would ordinarily curl my hair.”
However, in all of those hearings, almost no one bothered to unearth the problem that Mulvaney hinted at: Why was Mylan able to increase that price in the first place? Government intervention. Burdensome FDA regulations and other laws pressuring public schools to buy the drug essentially granted Mylan a monopoly. It was as misguided then as it is now to think that these same institutions can be trusted to clean up the mess they created.
Mylan had no effective competition, so there was nothing to stop the price gouging until it got so bad that even the regulator had to pay attention. If there were other pharmaceutical companies allowed to compete, do you think Mylan would have risked jacking up the price only to watch their competitors gaining market share?
Scott Alexander explained the Mylan monopoly quite expansively in 2016.
Fast Food – Would You Like Capitalism With That? I THE COLD WAR
IT’S HISTORY
Published on 8 Jul 2015A city that is not plastered with branches of US Fast Food chains is a rare sight nowadays. That wasn’t always the case. Fast Food, as we know it today, is a child of the economic boom after World War 2. Taking your new car for a ride to the Drive-In restaurant and getting a fresh burger; that’s the American Dream right there. Ultimately the concept of identical taste and identical manufacturing steps is one thing: pure capitalism. Food chains keep wages and costs as low as possible and that is why Fast Food is not nearly as glamorous today as it once was. So put down that Hamburger and find out all about the history of Fast Food with Guy on IT’S HISTORY.
Big Mac Index: http://bit.ly/TheBIGMACIndex
January 12, 2018
Investing: Why You Should Diversify
Marginal Revolution University
Published on 30 Aug 2016So far, we’ve been telling you what not to do when investing. Here’s what you should do: diversify.
Don’t put all your eggs in one basket. Definitely, don’t put your investment money solely in your employer’s stock. That’s very loyal, but it’s a terrible strategy. Just think of Enron’s employees. They had huge chunks of their retirement funds in company stock. Upon Enron’s collapse, many employees who were once multimillionaires ended up with almost nothing.
As you can see, diversification is much safer. Diversification reduces risk by spreading your investment across different assets, doing so without reducing potential returns. Plus, modern financial markets make diversification easy. For example, our favorite investment instrument is the low-fee index fund. These funds mimic a large market basket of stocks, like the S&P 500. The sheer variety in the fund is what mitigates the risk. It’s diversification for the win.
A quick reminder, though. Choose an index fund with low fees. Fees may seem trivial, until you watch them eat away at your investment. Imagine this: take a hypothetical $10,000. Invest that in a fund with a 1% fee, and you’ll have roughly $57.5K after 25 years, assuming an average 8% return. Now, invest the same $10K, in a fund with a 0.2% fee.You’ll get roughly $70K over the same quarter-century.
Our point is — when it comes to investing, simple is best. So for example, if your employer offers a 401K, take the offer!
That being said, you might believe that the market is irrational. Anomalous, even.
No worries.
Next time, we’ll tackle behavioral finance to see if you can profit from anomalies, and irrationality.
January 11, 2018
QotD: Regime uncertainty
Washington’s destructive policies have been dubbed “regime uncertainty” in a strand of innovative analyses pioneered by Robert Higgs of the Independent Institute. Regime uncertainty relates to the likelihood that an investor’s private property — namely, the flows of income and services it yields — will be attenuated by government action. As regime uncertainty is elevated, private investment is notched down from where it would have been. This can result in a business-cycle bust and even economic stagnation. I recommend Higgs’ most recent book for evidence on the negative effects of regime uncertainty: Robert Higgs. Taking a Stand: Reflections on Life Liberty, and the Economy. Oakland, CA: The Independent Institute, 2015.
Steve Hanke, “What’s Killing U.S. Growth?”, Huffington Post, 2016-04-12.
January 6, 2018
Maslow’s hierarchy of needs meets the blockchain
Tim Worstall explains why sensible economists aren’t worried about robots taking all our jobs:
CryptoKitties is also so new that it needs explanation. It works on blockchain, so it’s sexy (Bitcoin!), although there’s no great reason why it should. It’s simply a collectible, as much as cigarette, football or baseball cards were. AN Cat exists digitally, others do too, they can breed and, as in a pretty standard Mendelian model, attributes are inherited to varying degrees.
People are willing to spend real money on gaining the attributes they want. All the blockchain element is doing is keeping track of who owns what – a pretty good use for blockchain even if a payment system might not be, an ownership registry being a different thing.
Apparently, 180,000 people are into collecting CryptoKitties now, having spent some $20m of real-world resources on their fun.
And this is why economists aren’t worried about automation leaving us with nothing to do. Partly, it’s this inventiveness on display, the things that humans will find to do. Breeding digital cats? But much more than that, it’s about the definition of value.
And here’s where Maslow enters the discussion:
there’s something called Maslow’s pyramid, often known as Maslow’s hierarchy of needs. We humans like our sleep, water, food and sex – and in roughly that order too. Only when one need earlier in the chain is at least partially sated will we get excited about finding more of the next. In a modern society most of these are well catered to, which is why we also desire, even demand, things further up the pyramid, such as TV shows, ballet, Simon Cowell, collectibles and so on.
It’s also true that economists insist this value is personal. It’s whatever value the individual places upon the whatever, market prices being the average of those summed. Just as we cannot say that one form of production creates more value than another, we cannot say that £10 of value in a collectible is lesser than £10 in food. We can, as in the pyramid, say that if the food desire isn’t partially sated then the collectible won’t be thought about, but order of desire isn’t the same as value.
All of which leads to “no worries she’ll be right” about automation. Say the robots do come in and steal all our jobs, and the algorithms do all the thinking – we’re not going to be left starving and bereft with nothing to do.
We’ll not be starving because the machines will now be doing everything. If they fail to do something as obvious as growing food, then we’ll all have jobs growing food. In fact, given the machines are making everything so efficient, we’ll all be stunningly rich – for all production must be consumed, that’s just an accounting identity.
But what are we going to do if we’ve not got those jobs? One answer is that we’ll start producing things further up the pyramid. More ballet, more poetry, more trifles like that. Why not? That’s what we’ve done every other time we’ve beaten the scarcity problem with more basic items, it’s the basis of civilisation. Only once we don’t need 100% of the people in the fields growing food can we have some portion of everyone off doing the civilisation bit.
But doesn’t this mean that we’re all going to end up doing terribly trivial things? Yep, it sure does. There are people out there making a very fine living from kicking a ball around, something that four centuries ago would have been considered total frivolity compared to growing food or chopping heads off enemies. The machine-driven future will have people doing what we today consider to be frivolous.
January 4, 2018
Who Is More Rational? You or the Market?
Marginal Revolution University
Published on 6 Sep 2016We mentioned before that it’s hard to beat the market. And you shouldn’t try. But what about market anomalies?
One anomaly is the Momentum Effect — where past stock performance predicts future performance, at least a bit. As an example, portfolios with past winners tend to outperform the market in the medium term. Why is that? The market sometimes under-responds to changes in information. Thus, some stocks can lag, even if rationally, they shouldn’t. This is why picking past winners can generate some profit, though the profit’s usually small.
There are also other anomalies, like the Monday Effect, where stocks fall more on Mondays. Or, there’s the January Effect, which says that stocks surge higher in that month. There’s been some evidence for these effects, but these anomalies don’t last.
Despite its flaws, the market is still more rational than you. Don’t forget, you’re probably like most individual traders. You may become overconfident. You may not calculate probabilities that well. And if the market crashes, you’re likely to act more emotionally than you should — just like everyone else.
But don’t just take our word for it — even Warren Buffett agrees! Don’t try to beat the market.
QotD: “[G]reedy corporations sacrifice human lives to increase their profits”
The charge that sways juries and offends public sensitivities, and helps explain the large awards, is that greedy corporations sacrifice human lives to increase their profits.
Is this charge true? Of course it is. But this isn’t a criticism of corporations; rather it is a reflection of the proper functioning of a market economy. Corporations routinely sacrifice the lives of some of their customers to increase profits, and we are all better off because they do. That’s right, we are lucky to live in an economy that allows corporations to increase profits by intentionally selling products less safe than could be produced. The desirability of sacrificing lives for profits may not be as comforting as milk, cookies, and a bedtime story, but it follows directly from a reality we cannot wish away.
The reality is scarcity. There are limits to the desirable things that can be produced. If we want more of one thing, we have to do with less of other things. Those expressing outrage that safety is sacrificed for profit ignore this obvious point. For example, traffic fatalities could be reduced if cars were built like Sherman tanks. But the extra safety would come at the sacrifice of gas mileage, comfort, speed, and parking convenience, not to mention all the things you couldn’t buy after paying the extraordinarily high price of a Tankmobile. Long before we increased automotive safety to that of a Tankmobile, the marginal value of the additional life expectancy would be far less than the marginal value of what would be given up. It simply makes no sense to reduce traffic deaths as much as possible by making automobiles as safe as possible.
Dwight R. Lee, “Sacrificing Lives for Profits”, The Freeman, 2000-11.
December 27, 2017
Will Hutton mansplains Blockchain … as he understands it
Tim Worstall tries to mitigate the damage caused by Will Hutton’s amazing misunderstanding of what blockchain technology is:
Will Hutton decides to tell us all how much Bitcoin and the blockchain is going to change our world:
Blockchain is a foundational digital technology that rivals the internet in its potential for transformation. To explain: essentially, “blocks” are segregated, vast bundles of data in permanent communication with each other so that each block knows what the content is in the rest of the chain. However, only the owner of a particular block has the digital key to access it.
So what? First, the blocks are created by “miners”, individual algorithm writers and companies throughout the world (with a dense concentration in China), who want to add a data block to the chain.
Will Hutton is, you will recall, one of those who insists that the world should be planned as Will Hutton thinks it ought to be. Something which would be greatly aided if Will Hutton had the first clue about the world and the technologies which make it up.
Blocks aren’t created by miners and individual algorithm writers, there is the one algo defined by the system and miners are confirming a block, not creating it. The blocks are not in communication with each other, they do not know what is in the rest of the chain – absolutely not in the case of earlier blocks knowing what is in later. It’s simply a permanent record of all transactions ever undertaken with an independent checking mechanism.
It’s entirely true that this could become very useful. But it’s really not what Hutton seems to think it is.
India’s Geography Problem
Wendover Productions
Published on 5 Dec 2017
