Consulting by RPM || Free Advice Blog

Potpourri

==> Some of you may have heard of the ethanol “blend wall.” In brief, the US government is literally requiring gasoline refiners to do contradictory things: One regulation insists they make the gas content higher than 10 percent ethanol, while another regulation forbids them from doing so. My colleague Mary Hutzler was the lead author in this blog post on the issue, which gives you all the background. Then in this shorter piece, I dug up a graph showing how much gasoline exports have risen in the last few years. (One of the consequences of the absurd regulations is that US refiners now have an incentive to ship gasoline out of the country, driving up prices domestically above what the world price of crude would warrant.)

==> The bookish von Pepe sends this Glasner post on Hayek vs. Hawtrey. I loved this quote from Hayek: “[W]hat Mr. Hawtrey, in common with many other English economists…lacks is an adequate basic theory of the factors which affect [the] capitalistic structure of production.” Although I must also appreciate the zinger Hawtrey delivered:

The result has been to make Dr. Hayek’s work so difficult and obscure that it is impossible to understand his little book of 112 pages except at the cost of many hours of hard work. And at the end we are left with the impression, not only that this is not a necessary consequence of the difficulty of the subject, but that he himself has been led by so ill-chosen a method of analysis to conclusions which he would hardly have accepted if given a more straightforward form of expression.

==> I don’t like his conclusions, but Scott Sumner has been doing a very nice job laying out his worldview in some recent posts (here, here, and here).

==> I loved this quote from Don Boudreaux, who was criticizing a Jonah Goldberg column:

In what universe is a human being, one called “president of the United States,” who cannot be trusted to spend other people’s money wisely – who is held to be rash and irresponsible when pushing legislation to extend health-insurance coverage – who is regarded as arrogant and ignorant for his support of greater government regulation of financial markets – who is accused of being a dangerous social engineer when he launches schemes to redistribute wealth – who is exposed as a typical, high-on-hubris, popularity-grabbing politician who never lets his incomprehension of matters soothe his itch to tax, spend, and issue diktats all in ways that conservatives correctly understand to be destructive – in what universe is such a person to be trusted and saluted as Our Protector and as a paragon of prudence whenever he turns his attention to deploying military force?

Like conservatives, I look with deep suspicion upon any politician who exercises authority to spend other people’s money, to regulate wages, or to plan a ‘green’ economy. Unlike too many conservatives, however, I look with even deeper suspicion upon any politician who exercises authority to kill.

Was the Iraq Invasion “About Oil”?

This is a great question, and David R. Henderson’s answer is what I would say. The only difference is, I am less confident that it is right, as compared to David’s apparent confidence. Here’s what he said:

[W]as the second war against Iraq about oil?

In a sense it was, and in a sense it wasn’t.

Here’s the sense in which it was. Various important participants seemed to havethought that it was. Virtually all involved, will, I think, grant that Vice President Dick Cheney had a large influence on the decision to invade Iraq. Here is David Frum’s recollection of part of Vice-President Dick Cheney’s thinking:

In 2002, Chalabi joined the annual summer retreat of the American Enterprise Institute near Vail, Colorado. He and Cheney spent long hours together, contemplating the possibilities of a Western-oriented Iraq: an additional source of oil, an alternative to U.S. dependency on an unstable-looking Saudi Arabia.

So, for Cheney, oil does seem to have been an important factor in his support of the invasion.
…
But you can do something with motive x even if motive x doesn’t make sense. Which brings me to the sense in which the war wasn’t about oil: From a narrowly selfish point of view, it didn’t make sense to fight war for oil. Here’s where economics kicks in. There is a world market for oil. There is no danger that a country that wants to keep the United States from getting oil can do so simply by restricting sales to the United States. The reason is that it will then want to sell its oil elsewhere. That means that someone who buys that newly freed-up oil will then want to buy less from his suppliers. Those suppliers then have oil to sell and Americans can buy that oil. It’s a game of musical chairs in which the number of chairs equals the number of players. The game would be awfully boring, but in international trade, boring is good.

The only way a country’s government can hurt the United States using the “oil weapon” is to reduce its own production. But then, that country, unless it produces a huge amount of the world’s supply, will hurt itself as well. And that country will hurt its oil-consuming allies and help its oil-producing enemies. I’ve laid this all out in “Do We Need to Go to War for Oil?”

Now, it’s possible that Cheney, Bush, Abizaid, et al were a bunch of economic illiterates. So, again, in that sense, the war could have been about oil even if it didn’t make sense to be about oil.

As I said, if you ask me my opinion, I would give the above answer. But, it seems undeniable that the reason “we’re over in the Middle East” is oil. In general, when people ask me, “Are the people running the government stupid or evil?” I give the cute answer, “They’re not stupid.” So I am a little uncomfortable saying so casually, as David implies here, that the whole foreign policy of the United States is based purely on basic ignorance of economics. I wonder instead if there is an even more nuanced middle ground, whereby it makes sense (say) for a power-hungry group to want to “control” oil, even if that doesn’t translate into lower pump prices for American motorists (for whom they care not a whit).

I am confident David and I are right on the general economics of what’s good for American consumers and how to keep oil prices low, but I’m not sure we should assume governments are trying to ensure the free-flow of oil to their citizens. I could imagine strategic reasons involved that make it valid to say (from their point of view), “We need to put in a friendly government here, to ensure our uninterrupted access to such-and-such resources.”

Progressives Call Our Bluff on Minimum Wage

You know how some of us knee-jerk libertarians were scolded–by friends and foes alike–for saying, “Well gee Mr. President, if raising the minimum wage to $9/hour is a good idea, why not $20 or $100?” Well now we’re getting dangerously close to this.

There’s now a video floating around the Intertubes, praised by progressive pundits and (with reservation) by econ grad students alike, where Sen. Elizabeth Warren tiptoes up to endorsing a $22/hour minimum wage. (I saw this first on EPJ.) Now it’s true, neither she nor her progressive fans comes out and says, “I want the president to push for a $22/hour minimum wage,” but you certainly get the impression that it would be good for workers, and–at the very least–that it’s pure greed by the fat cats that prevents workers from earning that much right now.

What the heck is going on here? We’re not talking about a “modest” change that Krugman et al. hide behind when we free-marketeers go nuts on this stuff. (Even here, I’m still waiting for someone to show me why going from $7.25 to $9/hour–which is a 24 percent increase–is “modest.” If the government cut the deficit by 24 percent in a year, I doubt Krugman would dismiss it as “modest.”)

Is there anyone with economics training who actually thinks there are millions of workers generating $22/hour for their bosses, but are only getting paid $7.25/hour? And I’m talking gross pay; of course the tax man grabs a huge cut of what workers produce.

If so, why doesn’t the writer for the Daily Kos team up with Senator Warren and open a restaurant? They could pay $15/hour, more than doubling the pay of current minimum wage workers, and still make an absolute killing.

Update on Krugman Debate

Nothing new here, but some of you might prefer video to text:

And here’s where you make your pledge…

Potpourri

==> An excerpt from Guido Hulsmann’s introduction to (what we know as) The Theory of Money & Credit. Incidentally, I wrote a Study Guide for this book, and believe me, it’s not as intimidating as it first appears. If you have always wanted to be the type of person to read it, but thought you weren’t smart enough, I would encourage you to give it a shot with my SG to help.

==> I critique the Brookings Institution on their call for a carbon tax.

==> It would be easy for me to dismiss this Stephan Kinsella essay by saying, “Sure the president has flying killer robots, but at least we have legal porn!” but I am not that kind of jerk.

==> Great piece by David R. Henderson on Rand Paul’s filibuster (which I totally missed while carousing in the Caribbean).

==> I can tolerate Scott Sumner when he’s bashing Keynesianism.

==> I am friends with Glen (he was my TA at NYU) but come on…

UPDATE: Just to clarify, Glen is older than me. When I was a student at NYU, he was the TA of a micro class, and my favorite TA in fact. Also, I am fully aware of the irony of me complaining about an economics project involving the undead.

You Can’t Judge a Man By His Fans, Of Course…

…but this is still funny. Gus Spanier sent me this note:

I posted a comment on this video referring to your debate challenge to Mr. Krugman. I [received] this reply from a Krugman supporter.

“Austria is not America. Murphy thinks that Austria is a super power that prints it’s own money. Why on earth would Krugman debate Murphy when Murphy doesn’t even know what he’s talking about? America is not Austria. If America was Austria it wouldn’t need a centralized bank. Austria benefits from 3 banks for Chrissakes. Murphy is a tool.”

How can you argue with that brilliance?

Responding to a Particular Argument on the Minimum Wage

Before my trip, someone on Facebook asked me to respond to his perspective on the minimum wage. He thought the free-marketeers, by rushing to their textbooks, were overlooking something important. I’ll try to distill his position down into a single paragraph (in my words), then respond:

CRITIC OF STANDARD FREE-MARKET DISCOURSE ON MINIMUM WAGE: I’m not saying I’m in favor of the government setting a minimum wage, but I think you guys are overlooking a crucial point. All of the food stamps, public education, and other forms of welfare represent an implicit subsidy to businesses. By giving workers the ability to survive on lower wages, the government increases the bargaining power of the employers. They can get away with paying a wage that is literally below subsistence level. So when we rail against the unfairness of violating the sanctity of business profits, let’s not forget this implicit subsidy.

I told this guy that my only objection to the above, was that the economics were totally wrong. Generally speaking, the reality is the opposite of what he says. Welfare payments make wages higher than they would otherwise be. They make the workers have a stronger bargaining position, not weaker.

As usual in these issues, exaggerate the numbers to see it clearly. Suppose the government gave out vouchers entitling people to steak dinners every night and a room with a king sized bed at a posh hotel. Would you see a lot of people working at menial jobs? Probably not. If you could have a decent standard of living by doing nothing, then on the margin you’re less willing to give up your leisure for a little bit of money picking tomatoes.

Suppose there’s no minimum wage law, so employers can charge whatever the market will bear, but we still have food stamps etc. in place. Think about whatever the new equilibrium will be, in terms of people working. Now, in this setting, all of a sudden the government takes away all of the food stamps etc. I submit that this would make workers willing to work for less than they did before. If they hold out now, they will literally starve to death; they need to work or else they’ll die. But before, with food stamps, they could refuse to work and still manage to survive.

One final attempt: You’ve got two guys who get laid off from a factory in Detroit. They both had identical jobs paying $40,000, and would like to get a comparable job. But there’s nothing like that available, so they have to settle for jobs they think are beneath them, like becoming a janitor or working at Wendy’s. The only difference is, one guy has $20,000 in savings in the bank, while the other guy has $200 in savings. Which guy is going to buckle first, and take the menial job? Which guy is going to hold out longer, looking for a job more similar to what he’s used to?

It’s the same logic with government support programs. They allow poor people to survive without earning labor income. It’s as if they are endowed with a bank account and savings, that they can draw down while unemployed. It gives them bargaining power against employers, meaning that they need to be offered a higher wage to make it worth their while to take a job. They can afford to walk away, since the government is providing them with food.

THE PROBLEM: I think what was throwing off my critic was that he is viewing the labor market as being determined by bare subsistence levels. In other words, businesses pay workers the very least amount necessary, to keep them from starving. If that were how labor markets worked, then yes, food stamps etc. would lead to lower wage rates. But that’s not how labor markets work. If it were, then we’d all be earning the minimum wage right now, yet we’re not. Even though it’s imperfect, and even though libertarian economists sometimes exaggerate the beneficence of real-world capitalists, it’s still true that there is enough competition in the labor market so that most of us earn well above the minimum wage. And that insight shows why raising the minimum wage will throw unskilled people out of work, which is hardly a good way of helping them or of taking their side against Big Business.

Sentences That Nowadays Would Disqualify You as Finance Minister of Austria

“How many an Indian tribe, in its foolish eagerness for pleasure, has sold to the palefaces the land of its fathers, the reservoir of its means of sustenance, in return for a few barrels of ‘firewater’!” — Eugen von Bohm-Bawerk, The Positive Theory of Capital, page 268