03 Mar 2017

Follow-Up On Free Trade and Household Analogy

Trade, Trump 6 Comments

I think Don Boudreaux would be fine with me quoting his comment from my previous post here in the big lights. So I’ll break his comment up and respond piecemeal.

Bob: Thanks. Your example is valid, but I believe that it doesn’t cast any suspicion on the household analogy (which, of course, was used also by Adam Smith).

Right, it was used by Adam Smith, but look at the different use to which it was put. Here’s Smith:

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” –Adam Smith, Wealth of Nations

Exactly. So now when it comes to the conduct of every private family, what would most people consider prudence? To have spending exceed income for thirty years in a row? No, that sounds incredibly imprudent. The prudent thing for a household is to actually have income exceed expenditures. And since the whole point of the van Cott FEE article was to tell us that in international trade, we should think of “exports” as income from our job and “imports” as our spending on consumption, then clearly what is prudence for the household can scarce be folly for the nation. Hence we should agree with Trump that we need to start running trade surpluses and make America great again.

Now back to Don’s comment:

“The argument for free trade – and the use of the household analogy – isn’t that trade is guaranteed to produce only happy outcomes. Just as individuals and households can be irresponsible and profligate, so, too, can larger groups of people (for example, citizens of a country). Just as a household can overspend, so too can the people of a country.”

Right, but that’s not what you would have gotten from van Cott’s article. Here’s what he said:

That the gains associated with exports ultimately trace to imports is no doubt a bitter pill for many to swallow! Nevertheless, virtually all of us organize our own economic lives consistent with this idea. In the marketplace we produce goods and services which we sell (export) to buyers. This is the source of our incomes which we use to buy goods and services from others—that is, import. The more imports, the better.

People who choose to export while importing as little as possible will find themselves ill-clad, ill-housed, ill-fed, and possibly dead in short order. [Bold added.]

I don’t see anything in there about imports possibly hurting you if they’re too high. He explicitly says, “The more imports, the better.” The kind of example I brought up was not even hinted at in his article. The whole point of his article was to tell you that imports were benefits and exports were costs, which is the flip side of how most people (including Trump) think about it.

Back to Don:

One additional, small point before signing off: I would remind your readers in light of your example that, while a country-level trade deficit might become all debt for the citizens of that country – and while such debt might be incurred exclusively and irresponsibly to increase consumption today – a country-level trade deficit is not necessarily debt, and in practice much of it is in fact not debt.

Right. In other words, Don is warning readers not to take the household analogy too seriously, because there are important ways that a “US trade deficit” really isn’t analogous to “a household that buys more shoes, houses, and food than it earns in income” (to use the three examples from van Cott).

Since the whole point of my post was to warn free traders in how they are telling people to make analogies with households, the fact that Don signs off by warning about this subtlety is, to me, further evidence that my warning was sound.

DO NOT MISUNDERSTAND ME, I understand the point Don and van Cott were making. It *is* important for people to realize that a country pays for its imports through its exports, and that other things equal it would be a blessing–not a curse–if foreigners for some silly reason decided to send us TVs and cars for free.

However, in the actual FEE article I was (moderately) criticizing, they were lecturing people who think like Trump, and telling them to think of trade like a household with income and expenditures. So I was merely pointing out that that *is* how Trump and his fans on trade think, and that’s why they understandably think it must be a really bad idea to consistently run trade deficits. That’s exactly the conclusion you would draw if you view the country as a household, where its exports are the job and imports are buying things like shoes, shelter, and food.

02 Mar 2017

Free Traders Might Want to Be More Careful With the Household Analogy

Trade 7 Comments

I am friends with Don Boudreaux and I love that he is hammering away on free trade. (Check out this cool post showing how much more knowledgeable Reagan was compared to Trump.) But I also get bored and like to make nitpicky remarks. So take this post in that light.

Don favorably links to a FEE article by T. Norman Van Cott. Here’s an excerpt from the opening and conclusion, and readers of this blog can easily fill in the gaps:

Among economics data watchers, a country’s exports enjoy a hallowed status. The ability of producers in country A to sell goods and services to people in other countries is taken as a sign of A’s economic strength, although the underlying metric for economic strength goes unmentioned. In addition, job counters across the spectrum constantly count the number of jobs associated with exports. The more export-related jobs, the better. In a nutshell, exports are intrinsically beneficial—no questions asked.

The problem is that virtually no one, except perhaps for a workaholic, runs their personal economic affairs like this…

That the gains associated with exports ultimately trace to imports is no doubt a bitter pill for many to swallow! Nevertheless, virtually all of us organize our own economic lives consistent with this idea. In the marketplace we produce goods and services which we sell (export) to buyers. This is the source of our incomes which we use to buy goods and services from others—that is, import. The more imports, the better.

People who choose to export while importing as little as possible will find themselves ill-clad, ill-housed, ill-fed, and possibly dead in short order. How can it be that what is economic wisdom for the individual not apply to a nation? Hint: it can’t!

I understand what van Cott / Don are trying to get across with this line of argument. But strictly speaking, if they really want the layperson to think of the country as a household where “exports” is the income and “imports” is the consumption, then you end up with Trump’s worldview.

Don’t believe me? Consider the following conversation.

DAD: Jimmy, it alarms me that you’re living beyond your means. I’m looking over your Excel budget, and last year your income was $40,000 but you spent $60,000.

JIMMY: Right, I did a great job. The whole point of working is to consume. Imagine someone who worked and worked and worked his whole life, but never consumed. What an idiot! That would be confusing costs and benefits.

DAD: Okay Jimmy, it’s not the amount of spending per se that bothers me. It’s that you’re spending more than your income.

JIMMY: Dad, you need to take an accounting class. The reason I was able to spend more than my income is that the credit card companies invested more in me, than I did in them. I ran a capital account surplus last year of $20,000. Far from demonstrating my profligacy, it showed what a great investment opportunity I am.

See what I mean? I think Don should be a little more careful before telling people to think of trade like a household, where exports are income and imports are consumption. In fact it’s precisely that mentality that is tripping Trump up–he’s thinking of the USA as a giant corporation, where a trade deficit signifies unprofitability.

01 Mar 2017

A Proposal for Local Government Reform — Guest Post by Barry Klein

Politics 1 Comment

[I’m giving a talk to Barry’s group in Houston, and he asked if he could get his message out through my blog. — Bob]

BY BARRY KLEIN

To reclaim liberty, embrace what’s working
~~~~~~~~~~~~~~~~~
Rolling back BigGov at the municipal level 
with single issue politics … using the Texas model
The Left and Right have found each other compatible in the Lone Star State. Trans-partianship is proved effective at the city level. The key is to work one issue at a time.
In 2015 Forbes online did a story about city ballot initiatives as a local tactic that can be scaled nationally.
Texas conservatives have enjoyed multiple triumphs as citizen lawmakers. We are shrinking government in home rule cities with charter amendments and building capital for future campaigns. On several occasions Democrats have worked with us side by side. This reform tool can be employed in all 50 states. The unrecognized potential of this tactic, a legacy of the populist era, rests on the fact that US law allows Americans to petition in any city we chose.
Once conservative activists decide they want to be lawmakers using the clipboard they have to give thought to how others will receive their reform propositions because they will be asking people to approve them on a future election day. When making law the small government philosophy has to be tailored to the conditions at hand. Political realism trumps rhetoric.
In the US we have 5,400 home rule cities. Dozens of small cities are typically found in major urban areas. This means teams of six reformers can complete a petition drive in a few days and move on to other cities. This tactic can be quickly scaled to a countrywide strategy. Hundreds of such drives can occur yearly. One of our resources is Ballotpedia, an on-line service provided by the Lucy Burns Institute, a libertarian group based in Wisconsin.
Texans have used this tactic to stop zoning in three Texas cities, stop water fluoridation, and kill two useless public work projects. It’s a perfect tool to attack the local plutocracy, crony capitalism, and barriers to employment that cities often create. Statist policies are ripe for reform using local ballot initiatives and non-partisan activism. Moreover, the vast majority of cities are small enough that it is a tactic that can be self-funded by volunteer signature gatherers. No waiting to find donors.
Every completed petition drive and election victory builds strength and morale. Because cities reflect the same big government tendencies of mission creep, regulatory overreach and special interest legislation found at the state and federal levels, local initiatives convert cities into classrooms for liberty. In these settings ethics and empiricism can be intertwined, and one can build an informed constituency eager to apply their new insights to all levels of governance.
Hundreds of policy changes annually is a quick way to set the tone of the national conversation. In this way we can transform our country. Let’s start now! Let the revolution begin.     (Call or email for details.)
Barry Klein  —— Houston, Texas —— 713-224-4144 —— gov.reform.pro@gmail.com
28 Feb 2017

Abbandonato’s Murphy Smackdown

Environment 61 Comments

I can’t remember if I already posted this? But the writer put so much work into it, I want to make sure I don’t neglect it.

In response to my IER post on the Clean Air Act, Aisling Abbandonato wrote a very lengthy critique. And here are the references to the article.

Unfortunately I’m swamped with “day job” stuff so all I can do is link…

28 Feb 2017

Contra Krugman Ep. 75: Economic Growth

Contra Krugman 3 Comments

I don’t have time right now to outline this episode, so let me just post the link.

One thing I’ll say: The episode revolves around Krugman saying that the Trump team’s forecast of 3 percent real GDP growth is absurd. I bring up the fact that Krugman confidently defended the Obama Administration’s economic growth forecasts back in 2009, literally “*sigh*ing” with Brad DeLong when Greg Mankiw challenged the rosy scenario. Needless to say, Mankiw was right.

27 Feb 2017

If Trump Is Half As Bad As His Critics Say…

Trump 108 Comments

…then how has he been cutting business deals for decades?

A progressive opponent of Trump, like Bernie Sanders, is being consistent. He thinks the market economy is a vulnerable thing that needs all sorts of government oversight to achieve even a basic level of functionality.

Also, fans of the market who strongly disagree with Trump’s policies (such as protectionism or immigration restrictions), but who think he is a sharp, misguided person, are also being consistent.

But what is weird to me are the (many?) thousands of libertarians / conservatives who revere a free market economy, and yet also think that Trump is a stumbling buffoon who is a pathological liar and surrounds himself with ignorant yes-men.

If that is the case, how is it possible that word on the street hasn’t alerted investors to this fact? Why was Trump still signing new deals before his political run?

I BESEECH YOU, in the comments please don’t say, “Bob, you can be good at business but awful with economic theory. Look at George Soros.” Yeah I get that. I specifically showed above that that’s not what I’m talking about here.

27 Feb 2017

Two Oopsies in Scott Adams’ Posts

Deep Thoughts, Scott Adams 17 Comments

I still enjoy checking in on Scott Adams (the Dilbert creator) to see his rival narrative concerning Trump. (Here’s a good example.)

However, I often find Adams carelessly pontificating on things when I suspect he isn’t nearly committed to the principle as his writing suggests.

The best recent example is his post, “How to Evaluate a President.” Adams opens like this:

Steve Jobs. Bill Gates. Mark Zuckerberg. Richard Branson. What do they all have in common, aside from wealth?

They all succeeded without the right kind of prior experience. Apparently they knew how to figure out what they needed once they started. I’ll bet they are all systems-thinkers, not goal-thinkers.

Adams then goes on to argue that Trump is a systems-thinker, and that’s the way to interpret the rocky start to his Administration.

To then give a more concrete example of what a systems-thinker does, Adams writes:

But in any case, as I often say, goals are for losers. Systems are better. As I describe in my book, a good system is something you do every day that leads you to better outcomes, not specific objectives. For example, going to college is a good system even if you don’t know what job you might later want. Any time you learn something valuable, that’s a system. Networking with important people is a system. And so on.

Does everyone see the problem? The four people Adams chose–namely Steve Jobs, Bill Gates, Zuckerberg, and Branson–did not finish college; Branson apparently didn’t even finish high school. (See here and here.) And this isn’t just ironic; Adams’ example of “going to college to help you get a job later on” is exactly wrong for his broader point.

For a different example of Adams not taking his own pontification seriously, in this post he writes: “On the conservative side, morality is usually seen as coming from God. I’m not a believer, so I see morality as a set of rationalizations for our biological impulses. Luckily, we evolved with some instincts for taking care of each other. “

So my question: If Adams doesn’t believe in an objective moral code, then why does he think it’s lucky that we have instincts to take care of each other? Would it make sense to write, “Luckily, our taste buds evolved to let us know how delicious ice cream is”?

24 Feb 2017

“If Ignorance Is Strength, How Strong Is Krugman?”

Contra Krugman 2 Comments

I picked the title this time for Contra Krugman (ep. 74), and I feel like Ralphie re-reading his essay on the Red Rider bb gun.

In this episode we have some fun, remembering all the diplomatic gaffes and serious policy blunders (such as the rollout of ObamaCare) under the previous Administration. The point isn’t to gloat or to say “But what about…” but rather it is to rebut Krugman’s refrain that right-wing Republicans have a monopoly on dumb moves.