19 Mar 2016

Contra Krugman Ep. 27 — Tom and I Talk Jobs & Trade

Contra Krugman, Economics, Shameless Self-Promotion 5 Comments

This one teaches some economics, just a heads up.

5 Responses to “Contra Krugman Ep. 27 — Tom and I Talk Jobs & Trade”

  1. Adrian Gabriel says:

    This is a great episode and always informative. I was just curious about one comment, Dr Murphy said, “back when I was a young Rothbardian…” Aren’t you still a Rothbardian Dr Murphy? I always considered you the new Rothbard.

  2. Tel says:

    Peter Schiff, Episode 151 covers similar arguments about global markets vs local markets, and puts forward some excellent points. Some of his points are related to the immediate short-run effect of a disruptive policy change (i.e. change tariff from 0% to 40% overnight) and the sovereign risk that goes with it (rather than the long-run equilibrium position) and I agree there’s a penalty with any arbitrary policy change. Business prefers stability because people can plan for how to handle most regimes, but they cannot make their plans around sovereign contrariness.

    Getting back to the CK talk, I have a few constructive quibbles:

    16:00 — Woods claiming that protection is equivalent to tax

    I disagree, and I can cite plenty of examples. Australia has a strong quarantine regime which is a type of border control but it also keeps foreign diseases out of the country. One of our economic advantages is that we are free of many parasites and disease… when the UK had a panic about “mad cow” disease, Australian beef was considered a premium product because of that tradition of being very strict on disease control. This quarantine has a real market value, other countries don’t like it, but I can tell you we eat pretty well around here and we export plenty of meat so there’s really no reason why we should care whether other countries like it (unless they can get us over the barrel on some other unrelated issue). I will point out that once a foreign disease takes hold, it’s all or nothing, completely non-linear event. Probably this will happen at some stage, but I totally support our government’s efforts to prevent that.

    There may be cases where protectionism is effectively just a tax, I’m sure you can find them, but conceptually they are very different. Any type of control can be used as a tax under certain circumstances (if I can prevent you doing something that you want to do, I can immediately find an opportunity to take a bribe in return for allowing you to go about your business), but that doesn’t mean this always applies. There is at least a possibility that officials actually do their job, remote though that may seem at times.

    18:00 — Sovereignty of international organizations and accountability

    OK, so the point is that I might see an opportunity to build a new factory in Vietnam, and take advantage of cheap labour. This gives good return on my capital, and it provides jobs to the Vietnamese which is probably useful to them, as well as technology transfer, on the job training, yadda, yadda. Now, this monetary investment becomes crystallized into physical (and immobile) form in the shape of a factory. The money was portable, but the factory itself is not. As an investor I lay myself open to the “hold-up problem” not just in terms of worker’s unions, but also the (nominally communist) Vietnamese government might consider holding me up over my capital.

    There’s logical reasons why I might want some sort of guarantee this isn’t going to happen. There’s reasons why a government might want to surrender some aspects of sovereignty provided the organization they hand the power over to is going to deliver a reasonable judgement, and thus convince investors they will get a decent deal.

    By all means do a CK episode on the “hold-up problem”, I have no doubt Krugman will give you opportunity.

    22:30 — Murphy talking about Hong Kong, large gross imports & exports, but small nett difference

    I agree that a small region based around large volumes of through trade (such as Singapore, Hong Kong, Taiwan, or in historic context Renaissance Venice, or Byzantine Constantinople) would be devastated by a closure of trade. It should not be forgotten that in other cases a nation can shrug off trade sanctions, for example economic sanctions applied to apartheid South Africa in the 1970’s and 1980’s had barely any effect (although they were hurt by the sporting sanctions suggesting that social issues are not always about money and goods) and recent attempts by the USA and EU to knock down Putin using economic sanctions have pretty much backfired.

    Anyway, the lesson here is that GDP as a single number cannot possibly capture the essence of a nation, and the exact effects of trade barriers are very variable, and depend on a lot of details. A massive country such as Russia full of fiercely independent and suspicious people who are accustomed to hardship and resigned to heavy drinking and heavy cynicism cannot be neatly placed on the same axis as a tiny island like Singapore full of people brought up in a mercantile tradition who (compared to the Russians) live much softer and more pleasant lives. Economic structure matters, institutions matter, culture matters, GDP fails to capture any of these.

    33:20 — Woods introduced the criterion: “the best for as many people as possible”

    That’s not liberty, that’s democracy. Liberty doesn’t count the number of people who feel good about something, liberty concentrates on the individual. Many people liking an idea doesn’t make an idea good… unless it comes down to a vote. I kind of feel guilty sneaking up an backstabbing you guys, because I know you do a great job on your show (better than I could do) but I just feel it’s so important to narrow down these very slippery concepts.

    Liberty and democracy are kind of antagonistic ideas, but ultimately it’s just impossible to escape the situation that they are complementary. Sometimes a decision needs to be made by a group, because the whole group is effected by it, and democracy is one way to do that. If we each pick up a rifle and start shooting each other, that’s another way to make a decision… and I would argue democracy is more efficient and less painful than trench warfare, while delivering a similar quality of decision making. As Churchill pointed out, when you consider the alternatives, democracy starts to look pretty decent.

    34:00 — Murphy and division of labour comparable between household and nation (Adam Smith)

    Can we really presume that division of labour does scale linearly without significant diminishing returns? I doubt it, but anyway it’s stated as a complete assumption without attempted proof either logical or empirical. I think there’s room for extensive discussion on this. Amongst individuals partly division of labour relates to natural talent, but the greater part would be training. In other words investment of time and money spent building up skills which is an irreversible commitment on the part of the individual. A household has between 2 and 10 individuals, while the USA has upwards of 300 million individuals. You can see there’s a lot more opportunity to specialize when you are one in 300 million, but after a while you have to ask whether extremely narrow skill sets are going to produce a significantly better outcome. I suggest that most of the ways to model this that immediately come to mind would show a diminishing return on narrow specialization.

    35:40 — Murphy talks about opportunity costs of US workers doing “something else”

    US Labor Participation rate peaked in 2000 at 67.3% and has been trending down ever since, with a trough in late 2015 at 62.4% (the difference being 4.9% of the US population, a large proportion of whom are young people). We must surely see this as an opportunity cost, because US workers are not being put to work doing “something else”. This is what encourages people to turn up at Trump rallies.

    36:40 — Murphy compares protection to a blockade (Henry George)

    The blockading nation can prevent all goods moving, or in cases like the blockade of Iraq the blockading nation can be selective on their own terms generally not to the advantage of the nation under blockade. In the case of protectionism, the nation itself gets to choose the nature of the trade, how much, what tariffs, etc.

    I know people around here hate the analogy, but once more the “front door” comparison is relevant here. If you control your own front door, you selectively allow some people to enter as your guests while keeping others out… but suppose I controlled your front door, and I get to decide who comes and goes… Henry George would say it’s exactly the same in either case (just a door after all), but no householder on Earth would agree, having control of that conduit is a great advantage as compared to someone else having control.

    Now there’s a case to be made that governments in control of a resource will often choose badly, with poor incentives and for the wrong reasons, how to make advantage of that resource… but this is a quite different case to say that the choice is irrelevant.

    40:40 — Murphy brings in the criteria “confers nett benefits on the nation as a whole”

    Bad, bad, bad Bob. I hate to be harsh, but it is for your own good (and mine). Individuals have ordinal preferences, but under no circumstances can these be combined into some “nation as a whole” metric. Firstly, the attempt to create a summation of ordinal values is mathematically impossible, but secondly there’s no known way to relate the experience of one individual to the experience of another individual such that we can trade off the utility in a meaningful manner. You could try democracy (see above) along with all the flaws of a democratic system, but if you are gonna go there then have the intellectual rigour to say, “yeah, I went there”. I don’t want to push democracy has your only choice, there may well be alternative concepts, but my point is that a link in your chain is flawed. If you pull the wagon with that chain, expect it to break.

    This is a fundamental problem. I’ve brought this up on Tom Wood’s blog a number of times and been fobbed off with annoyingly hand-waving excuses, but the problem runs deep. The enemies of liberty will use this to show we are weak. If you don’t thrash this out soon, then next time will be on a televised debate some decades from now when perhaps a lot more is at stake.

    Finally, please do listen to David Autor and Russ Roberts with an interesting alternative perspective on this same issue (I know it’s an hour, I’m sure you drive or go jogging or lift weights or something that gives you a chance to listen):


    • Adrian Gabriel says:

      Interesting point Tel, but it seems your subjective point of view on the value or harm of a government does not look at the effects of government intervention as a whole as Woods and Murphy were pointing out.

      First, in regards to Australia being free from disease, I would strongly disagree. It seems that Australian has faced certain situations where disease were prevalent in hospitalizations. See here: http://wwwnc.cdc.gov/eid/article/20/11/13-1315_article

      Indeed you may claim that paying that premium is worth it if Australia did not face a circumstance as we did in the US, but this does not answer the question of whether private companies could prevent disease on their own at a much lower cost. Let us not forget how important reputation is on the free market, and the effort private business would put into making sure their meat is free from disease. The extra government premium whether large or small IS a tax.

      In regards to sovereignty of international organizations, I would have to suggest reading Benjamin Powell’s research on Sweatshops. Nowhere did he state that governments impede upon private business, and when this happens they get the heck out of the country. In certain cases some corporations are given privilage through government law, but if it were the case that corporations would be held up or robbed of their production, they would leave. With free trade, this means relaxing government control. Not sure communist governments ever relax control and let in foreign direct investment, because this would reduce their government power. Take for example Chile during Pinochet’s rule. The movie “No” was about this, how when Pinochet opened his markets people in the country used modern technology to voice their opinion and get him out of office, which actually happened.

      In regards to US Workers doing something else, is due not to the fact of free trade at all, but without a doubt due to government hand outs and government welfare. If government welfare programs were reduced then people would not have an incentive to be lazy and not do something else. They would go out and find a job. Rothbard went over this extensively. I would suggest rereading that book as it seems you are yourself an avid follower of the Austrians.

      • Tel says:

        Interesting point Tel, but it seems your subjective point of view on the value or harm of a government does not look at the effects of government intervention as a whole as Woods and Murphy were pointing out.

        Under Austrian economics all value is subjective and there are no tools available to construct any “as a whole” metric. Woods and Murphy can give their own colloquial and subjective estimates as to what they think is good for the nation, or even good for the whole world… but it’s not based on any economic theory. The Keynesians have their “Aggregate Demand” metric, which is possibly better than nothing, but comes with a lot of heroic assumptions built in, and IMHO Austrians should always qualify their use of GDP and similar metrics because they are shaky and incompatible with Austrian theory.

        I didn’t say Australia was free of all disease, but in terms of our agricultural industries we are one of the lowest disease countries. For example (just based on Wikipedia) porcine reproductive and respiratory syndrome virus costs the USA $644 million annually, and costs Europe 1.5b€ annually. Very likely the costs in Asia are even higher, but not well counted.

        In Australia we keep it out by imposing restrictions on meat imports. This is a real advantage to Australian pig farmers, and it’s also a type of non-tax protectionism. You might be able to find some evidence that some consumers in Australia were harmed by not being able to buy imports (although meat is pretty cheap here, which is why we export so much). That said, the farmers have a powerful political voice and you can understand why they don’t want to see their herds trashed by disease.

        There’s much stricter rules for bringing animals into the country than for humans. With things like gastroenteritis that are usually not lethal and difficult to detect in travellers until the late stages of the disease, the Australian authorities just wave them through. The other alternative would require all human travellers to spend a week in a holding area and submit to a bunch of tests which is a step beyond what the authorities are willing to do.

        … but this does not answer the question of whether private companies could prevent disease on their own at a much lower cost.

        Well in the example I gave above, there are worldwide efforts to control the same pig virus in USA and Europe and those vaccinations are somewhat useful, but they haven’t solved the problem and this still imposes a significant cost. At face value it seems that the costs to Australians are much lower, although with individual preferences there is no measure of a true collective cost anyway. Other than having a democratic vote on it, there’s no real answer to that question. If the massive industries of USA and Europe cannot achieve disease prevention, unlikely anyone in Australia will do better.

        I think if you do have a vote on it you will find strong support in Australia for keeping the virus out… I certainly support our quarantine, even if my meat is very fractionally more expensive than it might otherwise be (but there’s no evidence of this).

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