Monthly Archives: July 2007

Friedman’s Birthday

Thomas Siems has written an excellent op-ed about Milton Friedman in today’s WSJ:

Today, in cities across America, events are being held to celebrate the ideas, vision and influence of the late, great economist and Nobel prize-winner Milton Friedman. This would have been his 95th birthday.

The occasion gives us a chance to look back on many of the questions Friedman contemplated during the course of his productive career. In particular, why do people in some countries prosper, while those in other countries live in poverty? Is it luck? Is it something that their governments do? Or perhaps it’s something that their governments don’t do?

[...]

Friedman taught that economic growth comes from innovation and entrepreneurship, by individuals whose minds are open to ideas and by firms engaged in competitive markets open to trade. Friedman saw cooperation in this competition. He saw opportunity in free markets and globalization. And he saw education and the free exchange of ideas as prerequisites to advancing this freedom for the next generation.

Indeed, Friedman once said, “Freedom is not the natural state of mankind. It is a rare and wonderful achievement. It will take an understanding of what freedom is, of where the dangers to freedom come from. It will take the courage to act on that understanding if we are not only to preserve the freedoms that we have, but to realize the full potential of a truly free society.”

So as we celebrate Milton Friedman’s birthday and achievements, we must continue his legacy and keep making the case for freedom.

Farm Subsidy Update

The Washington Post reports:

The House yesterday passed a far-reaching new farm bill that preserves the existing system of subsidies for commercial farmers and adds billions of dollars for conservation, nutrition and new agricultural sectors.

Passage of the 741-page bill by a vote of 231 to 191, after partisan battling unusual for farm legislation, was a major achievement for the new Democratic leadership.

If this is a major achievement, I would prefer that they just stay home.

Bad Economics

Charles Mudede is not impressed with our friend Tyler Cowen’s new book:

Cowen is pushing the idea that you must watch these movies in this way because of the “scarcity of attention.” But that is completely the wrong way of looking at it. One must watch these movies in this way not because of scarcity but because of the abundance of images. But, in the first place, why does Cowen come up with such an idea as “the scarcity of attention”? Not for existential or psychological reasons, but because scarcity is the ground on which his whole economic concept stands.

“The critical economic problem is scarcity,” he says in his book. Like all other capitalist economist, Cowen is ideologically welded to this bad idea of lack and shortages as the key problem. However, scarcity is rarely real but manufactured. There is an abundance of energy in the world. The sun gives it to us daily for free. All this talk about there being not enough energy, food, fuel has been essentially false. And the wars that have been fought to protect the little there is for survival have been false wars—wars whose only truth is that they benefited those who in this or that period of history owned the means of production.

If scarcity was an authentic problem (rather than a fabricated one) then Africa would not be poor.

I think that Mr. Mudede is very far off on several points so let’s take them one by one.

1.) “If scarcity was an authentic problem (rather than a fabricated one) then Africa would not be poor.” This is what we call a conspiracy theory. I guess we can just stop considering things to be scarce and the poverty problem would be solved. Who knew? In reality, Africa’s poverty problems stem from corrupt government institutions, failed financial assistance efforts and programs, and an inability of developed countries to allow them to compete freely on a global scale (i.e. free of competition with subsidized production).

2.) Mudede claims, “There is an abundance of energy in the world. The sun gives it to us daily for free. All this talk about there being not enough energy, food, fuel has been essentially false.” Sure, many things are abundant, but they are not infinite. The word economists use to differentiate between these concepts is “scarce.” Prices, as Hayek explained, provide the ex ante role of describing relative scarcity.

3.) Tyler claims that it is better to go from movie to movie at the multiplex rather than sit through just one. His argument is that it is pointless to wait around for a predictable ending when some great scene might be airing on the neighoring screen. Mr. Mudede replies that, “One must watch these movies in this way not because of scarcity but because of the abundance of images.”

Again, this ignores to scarcity of time. Time cannot be produced, it is finite. If time were abundant Tyler could afford to sit through the predictable ending and then move to the next screen. However, since Tyler values his time, he deems the opportunity cost of watching the predictable ending too high to warrant sitting through.

Growth

The Wall Street Journal reports:

The U.S. economy resurged in the second quarter from its wintertime fizzle as the drag from the housing sector lessened, businesses built inventories, and exports grew.

Gross domestic product rose at a 3.4% annual rate April through June, the Commerce Department reported Friday.

Hillary vs. Bastiat

“This issue of energy and global warming has the promise of creating millions of new jobs in America. It can be a win-win, if we do it right.”—Sen. Hillary Clinton, at last night’s Democratic debate in South Carolina

And with that, Clinton seemingly stumbled into the classic economic trap known as the Broken Window Fallacy. As described by the French economist Fredric Bastiat, the fallacy imagines some punk kid chucking a rock through a store window. A bad thing, right? Yet a contrarian onlooker offers that the troublemaker may have actually helped the economy because now the storeowner will have to hire a glazier, who will make money replacing the window. Then the glazier will use that money to buy bread from a baker, who then might buy shoes from a cobbler. And the “multiplier effect” goes on and on, creating a more prosperous economy.

But Bastiat points out that such reasoning ignores the hidden costs to the shopkeeper, who was forced to spend money on windows instead of something else that may have had higher value to him or society…

…If climate change “creates” 10 million new jobs over the next decade, who is to say those jobs would not have been created anyway, in the nanotechnology industry or healthcare or business consulting or some industry we have yet to imagine?

That’s our friend Jimmy P. of U.S. News and World Report. Of course, this is not the first time that Hillary has tangled with Bastiat.

Migration and Labor Markets

A new paper by Price Fishback, Shawn Kantor, and Leah Platt Boustan looks at the effect of internal migration on labor markets during the Great Depression. Here is the abstract:

During the Great Depression, as in the modern era, in-migrants were accused of taking jobs and crowding relief rolls. Unlike today, the targets of protest during the Depression were typically American citizens from other parts of the country, rather than the foreign born. Using aggregate data on internal migration flows matched to individual records from the 1940 Census, we analyze the impact of internal migration on various labor market outcomes. To control for the likely endogeneity bias that would arise if migrants were attracted to areas with high wages or plentiful work opportunities, we instrument for migration flows. The instrument predicts out-migration from local areas using extreme weather events and variations in the generosity of New Deal programs and assigns these flows to destinations based on geographic distance. As in many contemporary studies of immigration, our results indicate that residents of metropolitan areas with high in-migration rates did not experience a drop in hourly earnings. Instead, longer term residents of high in-migration areas experienced three types of economic dislocation. A significant number moved away. Many of those who stayed experienced either a drop in annual weeks of work and/or reductions in access to work relief jobs. During a Depression with extraordinary unemployment and an extensive amount of job sharing, these lost work opportunities were costly to existing residents.

Quote of the Day

I’m really boring. I’m surprised my wife hasn’t left me.

That is Arnold Kling with another self-deprecating commment (here is the previous one) nestled into an interesting post on reading.

Waiting for the doctor

Tyler Cowen asks: “Why might one have to wait for a doctor?” He offers a few hypotheses, as does Arnold Kling.

Tax Cure For Health Care?

Allan Hubbard has written an op-ed in the WSJ about health care reform. He makes a great point regarding the proposed SCHIP expansion…

For example, one bill, sponsored by Sens. Max Baucus (D., Mont.) and Charles Grassley (R., Iowa), would expand Schip dramatically beyond what it is intended to do. And it would be a dangerous step down the path of government-run health care, ultimately resulting in fewer options and lower quality care for American families.

The Baucus-Grassley proposal would expand Schip to cover many children who are not actually poor. A family of four making $82,600 would be eligible for taxpayer-funded health insurance.

It would also cause many people to drop their good private coverage and move to taxpayer-funded, government-run health care. In fact, the Congressional Budget Office has estimated that for every two people who would join Schip under this bill, one would drop his/her private health insurance — a striking example of “crowd-out” that is contrary to the purpose of the program.

Finally, this bill would run up a huge tab — $71 billion over 10 years — and would impose new tobacco taxes to pay for it. But even a large tax hike won’t pay for this bill’s vast expansion of the Schip program. Instead, the bill resorts to a massive budget gimmick to hide its true costs. This trick makes it appear that Schip’s costs under this legislation will steadily increase from $5 billion this year to $16 billion in 2012 and will then suddenly drop to $3.5 billion a year — a steep fall that won’t happen of course because millions of kids would lose coverage.

…but he loses me here:

The problem is straightforward: Under today’s tax code, people who are fortunate enough to get health insurance through their jobs get a big tax break — but those who have to buy coverage on their own get no tax break at all. That is not fair, and it is not wise. It makes it impossible for millions of Americans who work for small businesses or who are self-employed to afford health insurance. And it drives up the cost of coverage for us all.

So President Bush has proposed to level the playing field for health insurance. Under his plan, every family with private health coverage would receive a standard tax deduction of $15,000 — no matter where they get their health insurance. This deduction would encourage more people to buy their own health insurance, just like the mortgage interest deduction encourages more people to buy their own homes. Some have suggested that a flat tax credit could also achieve the president’s goal of leveling the playing field, and he has signaled that he would be open to that option.

I have two major qualms about this proposal:

  1. It is not realistic. I am not sure that those who cannot afford insurance would benefit from a $15,000 tax deduction.
  2. More importantly, there needs to be a radical shift in how health care is provided in this country. We need to eliminate all tax deductions and credits (whether personal or corporate) and move toward an insurance policy that is much more similar to auto insurance than modern health insurance. Such a plan would bring price back into the equation and limit the administrative costs of HMOs and other managed care organizations. The plan proposed by Hubbard essentially tries — rather unsuccessfully — to give everyone the incentive to over-insure.

Beware Health Study Headlines

The USA Today Headline reads: “Study: Diet soda linked to heart risks”

Apparently, they didn’t read their own article:

The results surprised the researchers who expected to see a difference between regular and diet soda drinkers. It could be, they suggest, that even no-calorie sweet drinks increase the craving for more sweets, and that people who indulge in sodas probably have less healthy diets overall.

The study’s senior author, Dr. Vasan Ramachandran, emphasized the findings don’t show diet sodas are a cause of increased heart disease risks. But he said they show a surprising link that must be studied.