Published on 12 Sep 2017
The math behind the National Debt is so complex that Reason TV decided to lean on “Cosmos” to explain it.
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We are about to begin a journey beyond ordinary human understanding. Lost somewhere between immensity and eternity. Join me, as we explore: Our Amazing DebtWe are all made of star stuff. And in America, we are all born more than $61 thousand in debt.
The collective debt we owe as a country now stands at $20 trillion, a level of debt unfathomable to our contemptible caveman ancestors.
How can we comprehend the sheer magnitude of the national debt? With our starship of imagination.
This is the USS Dumbitdownforme and it cost $12 billion to construct: all financed through debt. We didn’t have the money to build it and we didn’t want to raise taxes to pay for it, but we really wanted it. So, like a fiscal wormhole, we’ve used debt to puncture the reality of financial constraints, connecting what we want now to even more money we promise to pay later.
$20 Trillion is not just a lot of money, it’s all the money, and then some.
If we could round up all the US currency in existence–every dollar bill, every quarter, every penny–we’d still need another $18 trillion. All the gold that has ever been mined couldn’t even cover half of our debt.
Yet our story doesn’t end here.
Like our ever-expanding universe our debt is constantly growing larger. This year we will pay more than $250 billion on interest payments. Not the debt, just the fee for borrowing money.
Much as cosmic expansion will inevitably lead to the heat death of our own universe, the debt, too, is unsustainable. As nature seeks balance, so to will our creditors.
Will the government gut spending? Defund entitlements? Devalue our currency?
One day, perhaps in our lifetime, we will discover the answers and reach the limit of our amazing debt. But for now we can only behold this awesome force that binds all Americans, bewitching us with the fascinating possibility, that maybe, just maybe, we’re all f***ed.
Written and produced by Austin Bragg, Meredith Bragg, and Andrew Heaton. Edited by Austin Bragg.
September 13, 2017
Our Amazing Debt (Cosmos Parody)
Tesla’s experiment in price discrimination
Alex Tabarrok links to a story about Tesla using an over-the-air software update to help Tesla owners in hurricane-threatened areas get more range from their lower-battery capacity cars … but he says this may eventually come back and bite the company:
Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.
The kind gesture to Tesla owners in Florida is probably deeply appreciated right now, but…
Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”
Human nature being what it is, the smart money is betting on the “Thanks for the temporary upgrade, but what have you done for me lately?” attitude setting in quickly.
September 11, 2017
Harvey, Irma, and Frédéric – the “Broken Window Fallacy” returns
Jon Gabriel tries to set the record straight on what a natural disaster means for the economy (hint, ignore anyone who says the GDP will rise due to the recovery efforts):
Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.
As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.
The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.
The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey “could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”
Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”
Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.
And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!
Not so fast.
All of this is based on a misunderstanding of what the GDP actually measures. It’s a statistic that often gets mentioned in the newspapers and on TV, but it is almost always used in a way that misleads people about what is happening in the economy. GDP — Gross Domestic Product — is intended to show the approximate total of goods and services produced in a national economy. Thus, when the GDP goes up, it means that the current period being measured recorded more goods and services produced than in the previous period.
When a natural disaster like a hurricane, earthquake, flood, or tornado strikes a city, state or region, all the work required to fix the damage will artificially boost the recorded GDP for that year. But the affected area isn’t that much richer than it was before, despite the GDP going up, because the GDP does not measure the losses suffered during the natural disaster.
This is where Frédéric comes in. I’m referring to the French economist and author Frédéric Bastiat, who brilliantly illustrated the GDP misunderstanding in his essay “What Is Seen and What Is Not Seen“:
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
The GDP problem I identified at the start of this post is a general case of what Bastiat called the “Broken Window Fallacy”:
Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”
Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.
Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.
But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.
It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.
If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.
And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.
Now let us consider James Goodfellow.
On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.
On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.
Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.
From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”
Related: Shared by Thomas Forsyth on Facebook:
QotD: Does inequality matter?
The central problem with the book, however, is an ethical one. Piketty does not reflect on why inequality by itself would be bad. To be sure, it’s irritating that a super rich woman buys a $40,000 watch. The purchase is ethically objectionable. She should be giving her income in excess of an ample level of 2 cars, say, not 20; 2 houses, not 7; 1 yacht, not 5 — to effective charities. Andrew Carnegie enunciated in 1889 the principle that “a man who dies thus rich dies disgraced.” Carnegie gave away his entire fortune. (Well, he gave it at death, after enjoying a castle in his native Scotland and a few other baubles.) But the fact that many rich people act in a disgraceful fashion does not automatically imply that the government should intervene to stop it. People act disgracefully in all sorts of ways. If our rulers were assigned the task in a fallen world of keeping us all wholly ethical, the government would bring all our lives under its fatherly tutelage, a nightmare achieved approximately before 1989 in East Germany and now in North Korea.
Notice that in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. Piketty’s vision of apocalypse leaves room for the rest of us to do very well indeed — rather non-apocalyptically — as in fact since 1800 we have. What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer, too. His worry is purely about difference, about a vague feeling of envy raised to a theoretical and ethical proposition.
But our real concern should be with raising up the poor to a condition of dignity, a level at which they can function in a democratic society and lead full lives. It doesn’t matter ethically whether the poor have the same number of diamond bracelets and Porsche automobiles as do owners of hedge funds. But it does indeed matter whether they have the same opportunities to vote or to learn to read or to have a roof over their heads.
Adam Smith once described the Scottish idea as “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.” It would be a good thing, of course, if a free and rich society following Smithian liberalism produced a Pikettyan equality. In fact, it largely has, by the only ethically relevant standard of basic human rights and basic comforts. Introducing liberalism in Hong Kong and Norway and France, for instance, has regularly led to an astounding betterment and to a real equality of outcome — with the poor acquiring automobiles and hot-and-cold water at the tap that were denied in earlier times even to the rich, and acquiring political rights and social dignity that were denied in earlier times to everyone except the rich.
Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.
September 10, 2017
QotD: Peak oil
Witness, brothers and sisters, witness. The oil, it’s going to run out. Peak production of the world’s oilfields has either passed or is about to pass; from here on out it’s rising oil prices forever. Now we wave our hands and pronounce that the energy-guzzling capitalist West (and especially Amerikka) is so addicted to cheap oil that its decadent empire will collapse, collapse I tell you. Barely concealed gloating follows.
There are so many mutually-reinforcing idiocies here that it’s hard to know where to start. As I was thinking of writing about this, one of my commenters pointed out that above $32 per barrel it becomes economical to build Fischer-Tropf plants and make your oil out of coal. This is old tech; the Germans did it during WWI. At slightly higher price points, MHD generators to burn garbage start to look good.
These are instances of a more general phenomenon: markets adapt to price shifts! To wreck an economy with oil-price rises, they’d have to spike so fast and so far that you somehow couldn’t run the cement trucks to build the Fischer-Tropf plants. Not gonna happen.
In fact, the long-term trend will be that the amount of oil invested per constant-dollar value of goods produced in the U.S. economy drops faster than the price of oil rises. This is a safe prediction not because manufacturers have all bought into Green ideology but because they want to make money. This means that they have a market incentive to use their inputs (including oil) a efficiently as possible, and to substitute less expensive inputs for more expensive ones. It’s called capitalism, and it works.
(And, by the way, the cheapest input of all is information. Buckminster Fuller pointed out forty years ago that as technologies mature, the products tend to get smaller and lighter and less energy-intensive and smarter. Your cellphone today weighs less than it used to, and costs less oil to produces than it used to, because its design is smarter. Information has replaced mass. This trend will continue and accelerate.)
The peak-oil collapse scenario is not credible for five minutes to anybody who understands market economics. But the sort of people who believe it are blinded by their own prejudices; fundamentally they think market economics is an invention of the Devil. They need to believe in the collapse, because they need to believe that the wickedness of Americans and capitalists and Republicans will be punished.
Eric S. Raymond, “Peak Oil — A Wish-Fulfillment Fantasy for Secular Idiots”, Armed and Dangerous, 2005-11-13.
September 9, 2017
Minimum Wage: Bad for Humans, Good for Robots
Published on 7 Sep 2017
Jacking up the minimum wage sounds like a good idea, but it comes with disastrous consequences: low-skilled workers getting canned, employers cutting hours, and, of course, robots.
QotD: Picketty’s unsupported inequality claims
Piketty’s definition of wealth does not include human capital, owned by the workers, which has grown in rich countries to be the main source of income, when it is combined with the immense accumulation since 1800 of capital in knowledge and social habits, owned by everyone with access to them. Once upon a time, Piketty’s world without human capital was approximately our world, that of Ricardo and Marx, with workers owning only their hands and backs, and the bosses and landlords owning all the other means of production. But since 1848 the world has been transformed by what sits between the workers’ ears.
The only reason in the book to exclude human capital from capital appears to be to force the conclusion Piketty wants to achieve. One of the headings in Chapter 7 declares that “capital [is] always more unequally distributed than labor.” No it isn’t. If human capital is included — the ordinary factory worker’s literacy, the nurse’s educated skill, the professional manager’s command of complex systems, the economist’s understanding of supply responses — the workers themselves, in the correct accounting, own most of the nation’s capital — and Piketty’s drama falls to the ground.
Finally, as he candidly admits, Piketty’s own research suggests that only in the United States, the United Kingdom, and Canada has income inequality increased much, and only recently. In other words, his fears were not confirmed anywhere from 1910 to 1980; nor anywhere in the long run at any time before 1800; nor anywhere in Continental Europe and Japan since World War II; and only recently, a little, in the United States, the United Kingdom, and Canada. That is a very great puzzle if money tends to reproduce itself as a general law. The truth is that inequality goes up and down in great waves, for which we have evidence from many centuries ago down to the present, which also doesn’t figure in such a tale.
Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.
September 4, 2017
QotD: Even a world of perfect abundance would not be a crime-free world
So, when I woke up this morning I woke up thinking of how time is different in different parts of the world, which is what the people (Heinlein and Simak included) who pushed for the UN and thought it was the way of the future didn’t seem to get (to be fair, in Tramp Royale it becomes obvious Heinlein got it when he traveled there, and realized it was impossible to bring such a disparate world under one government.)
A minor side note, while listening to City, there is a point at which Simak describes what he might or might not have realized was Marx’s concept of “perfect communism” where the state withers away because there’s no need for it.
Simak thought this would be brought about by perfect abundance. There are no crimes of property when everyone has too much. There are no crimes of violence either, because he seems to think those come from property. (Hits head gently on desk.)
This must have seemed profound to me when I first read the book at 12, but right now I just stared at the mp3 player thinking “what about people who capture other people as sex slaves?” “What about people who covet something someone else made, including the life someone made for themselves? Just because everyone has too much, it doesn’t mean that they don’t covet what someone else made of their too much.”
Which is why I’m not a believer in either Communism or for that matter big L Libertarianism. I don’t believe that humans are only a sum of their material needs and crime the result of the unequal distribution of property. (There is also the unequal distribution of talent, or simply the unequal distribution of happiness, all of which can lead to crime — after all Cain didn’t off Abel because he was starving.) And I don’t believe humans are ever going to become so perfect we can get away with no government, because humans will always (being at heart social apes) lust for power, recognition and heck simply control over others (which is subtly different from power.) So we’re stuck with our good servant but bad master.
Sarah A. Hoyt, “Time Zones”, According to Hoyt, 2015-06-23.
September 3, 2017
QotD: Picketty’s misunderstanding of the supply and demand curves
The technical flaws in Piketty’s argument are pervasive. When you dig, you find them. The fundamental problem is that Piketty does not understand how markets work. In keeping with his position as a man of the left, he has a vague and confused idea about how supply responds to higher prices. Startling evidence of Piketty’s miseducation occurs as early as page 6.
He begins by seeming to concede to his neoclassical opponents: “To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price.” The words I italicize clearly mix up movement along a demand curve with movement of the entire curve, an error of first-term college students. The correct analysis is that if the price is “too high” it is not the whole demand curve that “restores equilibrium,” but an eventually outward-moving supply curve. The supply curve moves out because entry is induced by the smell of super-normal profits.
Piketty does not acknowledge that each wave of inventors, entrepreneurs, and even routine capitalists find their rewards taken from them by entry. Look at the history of fortunes in department stores. The income from department stores in the late 19th century, in Le Bon Marché, Marshall Field, and Selfridge’s, was entrepreneurial. The model was then copied all over the rich world. In the late 20th century the model was challenged by a wave of discounters, and they then in turn by the internet. What happens is that the profit going to the profiteers is more or less quickly undermined by outward-shifting supply. The original accumulation dissipates. The economist William Nordhaus has calculated that the inventors and entrepreneurs nowadays earn in profit only 2 percent of the social value of their inventions. If you are Sam Walton the 2 percent gives you personally a great deal of money from introducing bar codes into stocking of supermarket shelves. But 98 percent at the cost of 2 percent is nonetheless a pretty good deal for the rest of us. The gain from macadamized roads or vulcanized rubber, then modern universities, structural concrete, and the airplane, has enriched even the poorest among us.
Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.
September 1, 2017
The complex dance of supply, demand, scarcity, and price
Tim Worstall explains why laws against “price gouging” are denials of economic fact and actually work against getting urgently needed items to the people who require them:
Those little diagrams at the start of the Econ 101 class (supply, demand, price) are not optional extras to our universe, they are instead accurate descriptions of how we humans interact with it. If and when demand rises then price rises, this in turn encouraging an expansion of supply. Thus why we desire to have price flexibility in the face of either changes in supply or demand.
Consider Houston right now in the wake of Hurricane Harvey. It seems a good bet that the tapwater supply is disrupted — flooding has a tendency to do that. We would therefore assume the demand for bottled water has risen – the sensible who normally hydrate from that wondrous invention, the municipal water supply, will not be able to do so, thus increasing the demand for the bottled stuff. Equally, on the other side, there’s going to be a certain difficulty with supply at present — roads 5 feet underwater don’t exactly help trucking.
We thus desire to do two things simultaneously. We want to restrain demand to only the really important things and we want to incentivize greater supply.
Which is exactly what a price rise does for us.
With water at (just to make up a price) $99 a case, people are only going to buy it for drinking water, perhaps only in sippy cups. Which is excellent — we want whatever limited supply of potable water (we’ve really plenty of non-potable around, that’s the basic problem) there is in place to be used for that most valuable use, being potable. We’ve achieved one of our goals therefore, by allocating that scarce resource to its most valuable use: keeping people alive.
We also want to increase supply, though, and being able to sell in Houston for $99 something bought for $9.99 in Beaumont (again, just to invent an example) might well get a few boats carrying loads in – although quite possibly not from Beaumont. Thus, by allowing prices to rise, we’ve at least potentially increased supply.
Our price system, operating without constraint, is thus achieving the two things we desire, a curtailing of demand through rationing to only truly important uses, and a rise in supply.
“But,” goes the cry, “this isn’t fair!”
Indeed it isn’t, and ain’t that a shame, fairness not being a notable feature of this universe we’re struggling to inhabit. All we can do is the best we can. Which is, again, why I insist that there should be variable prices, why there should be no laws against price-gouging. Because this really is a disaster, there really are significant shortages in Houston right now, we really do want to solve them. Which means that we should be using all of the tools at our disposal.
August 31, 2017
Words and Numbers: Do Americans still have freedom of speech?
Apparently, James and Antony have given up the YouTube version of Words and Numbers and reverted to an audio-only version (at least I can still embed the player version):
These days, everybody is nervous about what you can say in public without getting slammed by retribution. But is that a free-speech problem, or does it only become one when the police start showing up? Do we live in a truly tolerant society if voicing an opinion, even if it doesn’t land you in jail, ends up ending your career? Antony and James explore these intricate issues.
“Harvey is not Katrina”
Nicole Gelinas on the crucial differences between the situation faced by New Orleans during Hurricane Katrina and that currently faced by Houston after being inundated by Hurricane Harvey:
The Houston region has received record rain, more falling in less than a week than it usually does in a year, and at least 30 people, including a Houston police officer, have died. Harvey, however, is not Katrina. One measure of this difference is in electricity provision. After Katrina, New Orleans was almost entirely without power for weeks. In Houston, by contrast, 94 percent of customers still had power as of early Wednesday.
Though we won’t know for sure for a while, the fact that Houston has kept the power on is likely in part a legacy of infrastructure investment after previous storms. Five years ago, Hurricane Ike actually cut power to 95 percent of Houston. But, as NPR reported after the storm, the city’s power company, CenterPoint, took steps after Ike, as well as after Tropical Storm Allison in 2001, to upgrade the grid, spending $400 million. Houston, helped by $50 million in federal money, cut down tens of thousands of trees along power lines and outfitted poles with the ability to re-route electricity away from damaged routes toward undamaged ones.
With power, hospitals can continue to operate; even Ben Taub Hospital, surrounded by water, kept the power on. Stores, too, have quickly begun to reopen. Power also means that people whose homes didn’t flood can stay put, lessening the burden on police to keep neighborhoods safe from looters. If the power stays on — as it should, now that worst of the storm is over — Houston should do well. If it goes out, the city will have far more serious problems.
[…]
Empty neighborhoods and business districts invite looting. Houston had already arrested 15 people as of late Tuesday for allegedly trying to steal everything from liquor to an ATM, and for attempted robbery, as well. These arrests, plus a nighttime curfew, are a good sign; after Katrina, New Orleans police officers failed to keep control over the city, both because of the severity of the damage, which left most of the city empty and dark, but also due to their longstanding poor performance. Harris County district attorney Kim Ogg and Houston police chief Art Acevado have already set the right tone to deter wrongdoing. Ogg said Tuesday that thieves “are going to feel the full weight of the law,” and Acevedo said he would push for tough sentences for people convicted. In New Orleans, by contrast, state and local officials’ apocalyptic invocation of “martial law,” rather than calm reliance on the rule of normal law, only exacerbated the sense of chaos.
With some, though not most, Houston neighborhoods now deserted, state law enforcement have a role to play here, as well, with federal support. A competent local police force will be busy, after a storm, in helping still-populated areas. In turn, state police and the National Guard, who have less experience interacting with people on a neighborhood level, can help by patrolling and securing empty areas. To that end, Texas has already activated the National Guard, adding 12,000 people to safety efforts, as well as for rescue and food distribution.
Oh, and as Caroline Baum points out, don’t be misled by idiotic claims that hurricane damage is somehow good for the economy:
You will no doubt hear assertions that the rebuilding effort will provide a boost to contractors, manufacturers and GDP in general. But before these claims turn into predictable nonsense about all the good that comes from natural disasters, I thought it might be useful to provide some context for these sorts of events.
The destruction wrought by a hurricane and flooding qualifies as a negative supply shock. Normal production and distribution channels are destroyed or disrupted. Producers have to find less-efficient (i.e. more expensive) ways to transport their goods. The net effect is lost output and income, and higher prices.
Over the years, I’ve observed a tendency among economists and traders to view such events through a demand-side prism. They see lost income translating into reduced spending on goods and services, which might even warrant some largesse from the central bank.
Of course, that is precisely the wrong medicine. Supply shocks reduce output and raise prices. The Federal Reserve’s interest-rate medicine affects demand. Lower interest rates will increase the demand for gasoline, among other goods and services, but they have no effect on supply. An easing of monetary policy under such circumstances would increase demand for already curtailed supply, raising prices even more.
But wait. What about all the new construction and investment necessitated by the devastation? Homeowners will have to rebuild. Businesses will have to replace destroyed or damaged plants and equipment. Pretty soon, we should start to hear about a boost to GDP growth.
In the short run, yes. But focus on the prefix, “re,” as in re-building and re-placing. After a natural disaster, housing starts are bound to increase, but there will be no net addition to the supply of homes. Capital spending will increase as well, but it will not expand the nation’s capital stock.
She also provides a link to this very topical essay by Frédéric Bastiat: That Which Is Seen and That Which Is Unseen. In short, we see the spending caused by the need to repair damages (in this case from the flooding), but we don’t see what might have been done if the money hadn’t needed to be spent just to replace existing stock.
August 29, 2017
The benefits and costs of an “open borders” policy
David Thompson linked to this Ben Sixsmith article on the pro and con arguments for open borders:
No one except a militant nativist would deny that some level of immigration is beneficial and should be accepted. After that, we face a question of scale. There are those, however, on the opposite end of the spectrum, who believe that no level of immigration should ever be denied. These are advocates of “open borders”; an idea as strange as that of the nativist — yet more dangerous for being considered respectable.
The liberal Economist magazine contains an essay promoting open borders. It imagines a world in which people are free to live and work wherever they please. It is an astonishingly biased and unreflective piece, which illuminates dangerous extremes of progressive utopianism:
A world of free movement would be $78 trillion richer https://t.co/0xLg6OLNEF
— The Economist (@TheEconomist) July 29, 2017
Perhaps I sound inhuman. Who could dislike people living and working wherever they please? It can be a splendid thing, but if everybody did it think of what that would entail. The Economist reports that if borders were opened, 630 million people would be likely to migrate. Perhaps 138 million would go to the US, expanding its population by almost a half. About 42 million would join the British, expanding their numbers by more than a half. How many would go to Australia, a country with a population of 24 million, and with infrastructure already under strain? Such influxes would pose monumental demographic changes, soon made more dramatic by the higher birth rates. It will be exacerbated by the fact that local governments will not be able to keep up with the building of roads, hospitals, schools and transport systems that citizens — both old and new — will demand.
A commenter at David’s blog quips that “It’s amazing how quickly the Economist turned into the Guardian“, but The Economist began to go in that direction quite suddenly in the late 1990s … at least, that was the point I noticed and gave up my annual subscription. As The Economist generally does not use author bylines, it’s not clear whether the change was driven by editorial diktat or staff changes over time, but what used to be a pretty staunch free market newspaper (as they prefer to call themselves) turned into a British version of typical American “liberal” magazines.
As Sixsmith points out, the masses of would-be immigrants to the west are not an undifferentiated cultural mass with broadly similar cultural, educational, and demographic profiles:
But what of proposed merits of open borders? A consistent failure of the Economist’s article is a reluctance to distinguish between different migrants. If one finds the study, it turns out that 54% of the men and women who expressed a desire to migrate came from Africa and the Middle East — with another 20% being from Central America. Yet the most successful immigrants, in terms of launching businesses and earning wealth, have been found to hail from Asia and Europe. A UCL study found that European immigrants to Britain contribute more to the economy than they take from it while the opposite is true for non-European immigrants. It is senseless, then, to claim, as the author of The Economist article does, that immigrants are “more likely than the native-born to bring new ideas and start their own businesses”. Immigrants do not come from “Immigrantland”. Population differences related to entrepreneurial and earning potential are real, and significant, and difficult to bridge.
QotD: The power of unions
Moreover, the ability of unions to raise the wages of some workers does not mean that universal unionism could raise the wages of all workers. On the contrary, and this is a fundamental source of misunderstanding, the gains that strong unions win for their members are primarily at the expense of other workers.
The key to understanding the situation is the most elementary principle of economics: the law of demand — the higher the price of anything, the less of it people will be willing to buy. Make labor of any kind more expensive and the number of jobs of that kind will be fewer.
Milton and Rose Friedman, Free to Choose, 1980.
August 27, 2017
Stop Subsidizing Sports!
Published on 25 Aug 2017
Let’s talk about “sports”—that thing where we gather around to watch a muscular stranger put a regulation-size ball in a specific location.
Why are taxpayers forced to pony up cash for athletic ventures that don’t benefit them? Franchise owners routinely extort massive stadium subsidies through threats of relocation and fake promises of economic revitalization. Universities jack up student rates to subsidize athletic programs that should be self-sustaining. And the Olympics is economically devastating to every municipality foolish enough to get suckered by one of the oldest scams around.
Mostly Weekly host Andrew Heaton explores the sports phenomenon and why we should quit throwing other people’s money at it.
Links, past episodes, and more at https://reason.com/reasontv/2017/08/25/stop-subsidizing-sports
Script by Sarah Siskind with writing assistant from Andrew Heaton and David Fried.
Edited by Austin Bragg and Siskind.
Produced by Meredith and Austin Bragg.
Theme Song: Frozen by Surfer Blood.
