21 May 2018

Contra Krugman AND Sumner on Nominal Wage Growth

Scott Sumner, Shameless Self-Promotion 6 Comments

My latest at Mises.org. It’s too long to summarize, except don’t miss my analogy:

[S]uppose a father sees his 25-year-old son lounging on the couch watching reruns. The father exclaims, “Jimmy, this has got to stop! All through your teenage years you kept getting raises and better jobs. But after your messy breakup last year, you’ve fallen apart. Your mother and I shouldn’t have let you move back in. You get a job within two weeks or we’re kicking you out!”

Then Jimmy, who has spent some of his copious free time reading the work of Scott Sumner, responds to his father in this fashion:

“Dad, dad, stop thinking like a micro economist. You seem to believe that my effort determines the pay I earn. But actually, monetary policy drives NGDP growth, and NGDP growth (per worker) is by far the most important determinant of my wage growth. (The other determinant is my income as a share of GDP.)”

20 May 2018

Nothing New Under the Sun

Religious 16 Comments

In my Bible study we are plodding through Numbers and we looked up the maps to see the Israelites’ route over the 40 years from the Exodus until entering the Promised Land. (TL;DR it was out of Egypt, through modern-day Israel, Jordan, and maybe Syria [just eyeballing the map].) It was amazing to me, since all of this stuff is so topical right now with U.S. foreign policy.

Believers in the Abrahamaic faiths would say, “Yep, it’s not surprising that people are still fighting over this sacred land,” and many Christian fundamentalists of course think the Bible predicts end times stuff going down in the Middle East.

I suppose on the other hand secular rationalists would say this is a (literally) self-fulfilling prophecy where a bunch of people believe some nonsense in old texts and this is fueling warfare today.

 

16 May 2018

Ideas for Bryan Caplan’s Next Book

Bryan Caplan, Humor 18 Comments

It just occurred to me last night that two books ago, Bryan (among other things) told parents that they should quit worrying, because studies of twins show that parents don’t have any lasting influence on their children’s futures.

Now in his latest book, Bryan tells teachers and professors that education has no lasting influence on their students’ futures.

In this context, here are some suggestions for Bryan’s next book:

  1. When the Diapers Come Off, the Man Is Made
  2. Pacifier, My Only Coach
  3. Big Bird…Or Big Fraud?
  4. Phonics Is for Suckers
  5. I Would Kill the People Who Gave Me This DNA…If I Had Free Will
  6. Turns Out John Calvin Was Right
15 May 2018

One Cheer and One Criticism for Don Boudreaux on Trade Deficits

Trade 15 Comments

(Notice kids that I’m doing this on my personal blog; I’m not picking a public fight with Don. Also, if Don has anything to say in response, I will edit this post and paste his reaction into the body, below.)

I think it’s fair to say that nobody has been hammering home the case for free trade since Trump got elected, more than Don Boudreaux. In the present post, I will first praise a subtlety that he has been making, showing the flaw in standard protectionist views. But then I will also criticize another of his posts, where Don repeats the same approach that Robert Barro used and which might (I claim) mislead people.

THE CHEER

In this post, Don writes:

After reading my letter in the Wall Street Journal on why U.S. trade deficits do not necessarily imply greater American indebtedness, Steven Crow describes the examples that I use to make my point as all involving “transferring U.S. assets to foreign creditors” (Letters, May 14).

Mr. Crow is mistaken.

Consider my example of BMW building a factory in South Carolina. This factory was created by BMW. Because it did not exist before BMW created it, this factory cannot possibly have been a U.S. asset that was ‘transferred’ to foreigners, be they creditors or otherwise. BMW’s factory in Greer, SC, exists only because BMW conceived of it, financed it, built it, and operated it profitably for the past quarter-century. It is neither an asset that ever belonged to an American nor one whose creation resulted in any further American indebtedness.

 

This is great stuff, and it underscores one of Don’s frequent points, namely: A trade deficit is not necessarily a form of debt increase, at all.

To really see it, forget about currencies and just think of barter. You’ve got two countries, USA and Germany, that (let’s suppose) initially have nothing to do with each other in terms of trade. Now in this year, the Germans decide to send over a cargo ship loaded up with bricks, cement, glass, lumber, and a bunch of alcohol and steak. The Germans then negotiate with some Americans for the following deal:

==> The American owner of a piece of land gets to keep a little bit of the alcohol and steak, in order to rent the use of his land for one year.

==> The American workers get to keep the rest of the alcohol and steak, in order to use the raw materials to construct a car factory.

The way the trade accounts are maintained, the US runs a trade deficit this year with Germany, because of the bricks, cement, glass, and lumber that Americans imported from Germany, without any corresponding exports. (In contrast, the American exports of labor and land rental exactly matched the American imports of alcohol and steak from Germany.)

Because we assumed an initial condition of no trade relations, this year’s trade deficit is also equal to this year’s current account deficit, which means there is a capital account surplus. And…YEP! The Germans invested and acquired a nice new factory in America, while the Americans made no investments in acquiring German-based assets.

Now in this scenario, Don wants to know: In what meaningful sense did the Americans become “more indebted” this year? It’s true that now the U.S. is “on the hook” for sending the net cars of this factory (after subtracting the cars that must be given in barter to the American land owner, as well as any workers employed in the factory) back to Germany, or to be sold to Americans for other goods that can then be shipped to Germany, but this flow of net factory output back to Germany (in the future) isn’t a subtraction from what Americans otherwise would have been able to consume. No, total output within the boundaries of the U.S. is now higher, because of the German investment.

 

THE CRITICISM

In this post, Don writes a letter to Donald Trump:

Earlier today you said “We’re importing a lot of cars. We want a lot of those cars to be built in the U.S. Build them here, and also ship them overseas. Doing a reverse act.”

Soooo….. You want to arrange for us to spend more of our own time, labor, and resources producing valuable outputs to be shipped overseas, and for us to receive fewer valuable outputs in return. I’m stumped. Can you spell out just how this arrangement will “make America great again”?

Are we made “great” when our government simultaneously obliges us to produce more goods and services for foreigners, and for those same foreigners to send to us in exchange fewer goods and services? In what way, Mr. President, do we Americans “win” at trade – in what manner are we Americans “put first” – when you force us to work harder than we otherwise would to produce goods and services for foreigners’ consumption, and for foreigners to work less hard than they otherwise would to produce goods and services for our consumption?

As I said in my reaction to Robert Barro, I think this type of argument might mislead most readers. (And again, let me say that I’ve used similar reasoning in the past.)

What some people might think Don means in the above–and this isn’t a strawman, because the WSJ editor (?) who subtitled Barro’s piece explicitly fell into this trap–is something like this: “Right now we import a bunch of goods, and we export a bunch of goods, but the imports exceed the exports to the tune of 1 million cars. If Trump got his way, we would keep the other imports the same, but we’d cut back on imports by (say) 500,000 cars per year, and we’d keep our other exports the same, except we’d increase our car exports by 500,000 cars per year. Then we’d have balanced trade, going forward. But this is stupid,” so continues the person who might be misled by Don’s post, “because it effectively means every year, Americans have 500,000 fewer foreign cars to enjoy, and to add insult to injury, we have to bust our butts producing an additional 500,000 cars in order to send them abroad as gifts to foreigners. What kind of crappy deal is that?! Give me trade deficits any day!

OK so in case that’s what some of Don’s readers are walking away with…it’s wrong. Now to be fair, it is just as sophisticated (or not) as Trump’s mercantilism. But what I’m saying is that this type of view–which ends up thinking Americans are somehow lucky ducks with our trade deficit–is not right.

If we were dealing with spot barter transactions, then it would be correct to say that a decrease in the amount of goods given up–without a decrease in the amount gained–represents a boost in the “terms of trade.” So for example, if Americans initially are sending 1 billion bushels of wheat to Japan in exchange for 250,000 cars, and then the Americans manage to renegotiate the deal so that they only send 900 million bushels of wheat, then yes, this makes the Americans richer. Specifically, they are getting the 250,000 Japanese cars in exchange for 10% less wheat.

But when the U.S. runs a trade deficit, it’s not getting “more imports in exchange for fewer exports” in this sense. Rather, we are still paying “full market price” for all the imports, measured in dollars. The gap between imports and exports is made up by Americans selling net assets to the foreigners.

To return to our bushel/car example: Suppose instead of sending 1 billion bushels of wheat to Japan in exchange for 250,000 cars, that now the Americans send over 900 million bushels of wheat and sell IOUs promising the Japanese holders 115 million bushels to be delivered in 3 years in order to get those same 250,000 cars this year. Now it is not at all obvious that the renegotiated deal is better. In any event, it would be crazy to describe this renegotiation as the Americans getting the same quantity of Japanese cars in exchange for 10% less work.

14 May 2018

Potpourri

Potpourri 25 Comments

==> How do you choose among your children? This is in the top 5 of my all-time favorite Contra Krugman episodes.

==> The latest Lara-Murphy Show discusses “Lessons from History” (chapter 6 of our new book with Nelson Nash).

==> REMEMBER CHICAGO PEOPLE: Carlos, David Stearns, and I will be presenting on Austrian economics and IBC this Saturday. Details here.

==> This was recorded a while ago, but in this podcast Carlos and I are guests, talking about Austrian economics and the economy.

==> At IER I talk about gas prices in Vancouver, and how Trudeau says things are unfolding exactly as the Emperor has foreseen.

==> I realize that sometimes Rothbardians react too harshly against the “DC libertarians,” but this recent Michael Cannon piece contained the following line that shocked me (HT2 Michael Accad):

As hostile as libertarians are to government, even we believe government can legitimately order the withdrawal of life support, and prohibit parents from moving a child to obtain further treatment, when that treatment would fruitlessly prolong a child’s suffering – i.e., when further treatment would be akin to torture. In such cases, the government intervenes to protect the child’s rights. (British law frames the decision in terms of the “best interests” of the child, but it seems to me that language clouds the issue and thereby unnecessarily inflames passions.)

There is no objectively right place to draw the line between cases in which the government should and should not intervene. But I don’t know anyone who thinks it never should. If anyone does make that argument, they’re just wrong.

(The italics is in the original; I added the bold.) So as an aside, in the next sentences Cannon admits: “There is plenty of room to argue about whether British law and courts drew the line in the right place here. It did not appear Alfie was suffering, but doctors could not completely rule it out.” So that’s a bit ominous in itself, that apparently the burden of proof is on parents to prove beyond all possible doubt that their child isn’t suffering, before the government might forfeit its ability to make them stop offering medical care.

Yet I want to go back to the part that I put in bold. Cannon is working for an institution that teaches the world about libertarianism, and he is saying he literally doesn’t know a single libertarian who thinks the government should never forcibly prevent parents from giving more medical care to their baby? I would be shocked if there weren’t a dozen interns at Cato who believe that. Has Accad never heard of David Friedman? I don’t even need to talk about all the Rothbardians running around.

I realize it might seem like I’m going nuts over a little thing, but this was the whole POINT of his post. It’s not like he was talking about his plan to use tax credits to unwind ObamaCare by Fiscal Year 2034, and he made an offhand remark about libertarian rights theory.

13 May 2018

“Render Unto Caesar What Is Caesar’s, and to God What Is God’s”

Religious 6 Comments

Someone emailed and asked me to discuss the famous “render unto Caesar” story. So I’ll quote it in full (from Matthew 22), but I’m going to follow with what comes after, to put it in context:

Paying Taxes to Caesar

15 Then the Pharisees went and plotted how to entangle him in his words. 16 And they sent their disciples to him, along with the Herodians, saying, “Teacher, we know that you are true and teach the way of God truthfully, and you do not care about anyone’s opinion, for you are not swayed by appearances.[b] 17 Tell us, then, what you think. Is it lawful to pay taxes to Caesar, or not?” 18 But Jesus, aware of their malice, said, “Why put me to the test, you hypocrites? 19 Show me the coin for the tax.” And they brought him a denarius.[c] 20 And Jesus said to them, “Whose likeness and inscription is this?” 21 They said, “Caesar’s.” Then he said to them, “Therefore render to Caesar the things that are Caesar’s, and to God the things that are God’s.” 22 When they heard it, they marveled. And they left him and went away.

Sadducees Ask About the Resurrection

23 The same day Sadducees came to him, who say that there is no resurrection, and they asked him a question, 24 saying, “Teacher, Moses said, ‘If a man dies having no children, his brother must marry the widow and raise up offspring for his brother.’ 25 Now there were seven brothers among us. The first married and died, and having no offspring left his wife to his brother. 26 So too the second and third, down to the seventh. 27 After them all, the woman died. 28 In the resurrection, therefore, of the seven, whose wife will she be? For they all had her.”

29 But Jesus answered them, “You are wrong, because you know neither the Scriptures nor the power of God. 30 For in the resurrection they neither marry nor are given in marriage, but are like angels in heaven. 31 And as for the resurrection of the dead, have you not read what was said to you by God: 32 ‘I am the God of Abraham, and the God of Isaac, and the God of Jacob’? He is not God of the dead, but of the living.” 33 And when the crowd heard it, they were astonished at his teaching.

So the first thing to realize, is that the question about taxation was an attempt to trap Jesus. And it was a good strategy, because apparently no matter what He answered, they would have him. Remember that the Jews were suffering under the occupation of the Roman army, paying tribute to the distant Caesar. They longed for the Messiah to appear, as the prophets had promised. They thought that their king would rise up from the line of David and deliver them from their enemies.

So in that context, the Pharisees in public ask Jesus, should we Jews be paying taxes to Caesar? Now what could He do?

(1) He could say no. But then the Pharisees would be sure the Romans heard about that, and they would get rid of him as a rabble rouser.

(2) He could say yes. But then the hopeful Jews would have stopped speculating that maybe this healer was the Messiah.

(3) He could hem and haw and not answer. Then the crowds would realize he was afraid and his support would also dissolve.

Now that you realize the situation and how the Pharisees would have thought they had Him no matter what, go re-read what actually happened. It is one of the coolest little stories in literature.

Notice that it’s crucial for the “effect” that Jesus didn’t say the punchline first. He had to disarm everyone, suck them in (as it were), by telling them to pull out a coin and asking about it. This is absolutely masterful. It’s like a magician misdirecting the audience, or a comic professionally pacing the timing of his grand finale joke before saying goodnight.

What’s so astounding about his actual answer is that, simultaneously:

(A) He’s speaking a tautology that nobody could possibly doubt, and yet,

(B) It seems as if He’s giving them a very specific answer to their question.

I’m not saying this as a joke: Jesus’ answer here, in addition to all its other attributes, might be an example of a true synthetic a priori proposition.

Beyond all of that, His answer invites you to explore yourself, your worldview, your value system. The devout Jew could have paid taxes to Caesar because those tokens of secular commerce had nothing to do with the kingdom of God. (This is probably what most people think He was saying.)

However, He also could have been saying that God owns everything, and that the servant of God does not serve two masters. If a devout Jew thought that the tax money were being used for purposes contrary to God’s instructions, then he could have in good conscience disobeyed participation in an evil system. (After all, later on Christians would be fed to lions because they refused to pay allegiance to Caesar.)

12 May 2018

The Primary Determinants of Your Child’s Weight

Economics, Humor 6 Comments

“They just grow up so fast…” said one of the parents as we watched the graduation ceremony.

People talk like this a lot, but there’s really no mystery about the size of your child, once we specify the units (such as pounds). School lunch policy drives the growth in class calorie consumption, and the growth in class calorie consumption (divided by the number of kids per class) is by far the most important determinant of child weight gain. (The other determinant is the ratio of child weight gain to total class calorie consumption.)

I mean, once you spell it out like that, it’s all crystal clear why the kids are growing at the rate they are.

For more clarifications like this, check out EconLog.

11 May 2018

Potpourri

Potpourri 4 Comments

==> In the latest Contra Krugman, Tom and I tackle the eternal question: Is taxation theft?

==> Speaking of Krugman, Rob Bradley discusses a Resources for the Future (RFF) post that says Krugman is full of it when he breezily claims that wind and solar will produce all of our energy.

==> Although he’s inexplicably got a bunch of fans, turns out Jordan Peterson is not literally Jesus. reason breaks the story.

==> As Tho Bishop joked on Facebook, it seems the Swiss watched my recent debate with George Selgin. Speaking of which, this guy says he learned to stop worrying and now loves fractional reserves.

==> Some of you might be interested in my Twitter exchange with climate policy economist Richard Tol.