Monthly Archives: October 2007

Free Trade Consensus

Dan Klein writes:

Adam Smith said the division of labor is limited by the extent of the market. He saw that productivity increases when work is subdivided and specialized. But specialization only makes sense if the market is big enough to reward the investments and risks in specialized production.

Free international trade increases the extent of the market. International buyers and sellers thicken the market, and make the markets for specialized goods more competitive and reliable. That’s what makes further specialization justified in the minds of entrepreneurs. They go forward with specialization, and they enhance productivity. They make things used by people the world over.

That’s why we all gain from increases in the extent of the market. Large, thick, international markets invite the productivity investments, and the result is better stuff at lower prices for all of us.

Read the whole thing.

Also, for those interested, I have previously written about the division of labor here.

DeLong Podcast

Brad DeLong is podcasting. The podcasts mostly consist of his lectures with a few other discussions thrown in. I haven’t yet made it through those on political economy, but I highly recommend those on economic history.

His latest is a discussion with Tyler Cowen and Greg Clark regarding Clark’s book “A Farewell to Alms.”

Questioning Chinese Growth

Our friend Bryan Caplan questions the Chinese growth story.

Taking from one hand…

The New York Times reports:

Taking a cue from Midwestern farmers who have improved their lot by selling corn to ethanol distilleries, sugar cane and sugar beet farmers want an ethanol deal of their own, paid for by American taxpayers.

A little-noticed provision in the new farm bill working its way through Congress would oblige the Agriculture Department to buy surplus domestic sugar caused by the expected influx of Mexican sugar next year. Then the government would sell it, most likely at a steep discount, to ethanol producers to add to their fermentation tanks. The Bush administration is fighting the measure.

Sugar producers say the cost would be relatively low and the plan would help keep prices at a level they consider fair. As a side benefit, the deal would allow the nation to produce more ethanol to mix with gasoline, displacing some foreign oil, they say. [Emphasis added.]

The only “fair” price is one that is determined in the free market by individuals with dispersed knowledge.

Here is a simplified version of the plan:

1.) The government taxes you, thus reducing your disposable income.

2.) The government uses the money generated from taxes to purchase sugar from an industry that already receives $1.2 billion in subsidies from the government at what these domestic producers consider to be a “fair” price. (Note: According to the NYT, the “market price for sugar in the United States … is typically twice the world market price.” Is this a “fair” price? For whom?)

3.) This domestic sugar, which would be bought by the government for an estimated “22 cents per pound”, would then sold for “4 to 7 cents a pound” to an ethanol industry that is already heavily subsidized and restricted from foreign competition.

4.) Ethanol producers would then be forced to purchase new equipment that can process this sugar, which would increase the cost of production and thus the price of ethanol.

Masonomics

Although I never attended George Mason, my opinions have been strongly influenced by members of their economics department. Arnold Kling has written an excellent essay to generalize the type of economic thinking that is prevalent at George Mason. Here is a sample:

Dani Rodrik, an economist at Harvard, where we gets used without a second thought, thinks that Masonomics overstates the case for free trade. He argues that we cannot prove that everyone in a country benefits from free trade. This is true. In fact, it is theoretically possible for more people to be hurt by trade than benefit from it. Therefore, Rodrik implies, it is conceivable that we should have tariffs, or, at the very least, we need to compensate those who are “hurt” by free trade.

Masonomics says to lose the we. Instead, like John Lennon, let us imagine that there are no countries. John and Mary are trading, and they are both better off, but an economist calculates that Sam would be better off if John and Mary were prevented from trading. What entity has the moral authority to stop John and Mary from trading?

Governments lay claim to legal authority to collect taxes or impose restrictions on trade across borders. But there is no moral significance to a border. If John, Mary, and Sam all lived within the same country, the question of whether free trade is good for “us” would never arise. John’s right to trade with Mary without interference on behalf of Sam would not be questioned. It is hard to see how moving Mary across a border changes the situation from a moral or economic standpoint.

Read the whole thing.

Market-Based Universal Coverage

Ronald Bailey looks at the CED report on health care:

“The U.S. employer-based health-insurance system is failing,” declares a new report by the Committee for Economic Development (CED). The CED is a Washington, D.C.-based policy think tank comprised of business and education leaders. And it is right: Employer-based health-insurance is indeed failing.

Between 2000 and 2007, the percentage of firms offering health insurance benefits fell from 69 percent to 60 percent. The percentage of people under age 65 with employer provided insurance dropped by 68 to 63 percent. In absolute numbers, those covered by job-based insurance fell from 179.4 million to 177.2 million.

Their solution? “Market-based universal health insurance.”

I have a major problem with the set-up and the funding. For example, Bailey correctly points out the undesirability of the CED’s proposed government-issued health insurance credit. The credit would be funded by a new payroll or environmental tax. Of course, these taxes are regressive and thus hurt those that they are designed to help.

Overall, I am not sold on this idea or any others that call for wide-sweeping changes. While it is clearly preferable to one large government bureaucracy, there are many changes that we could make within the system to make health insurance more affordable, such as increasing competition in the insurance market by allowing individuals to purchase policies across state lines. I think that it would be greatly preferable to start with modest reforms that free the market for health insurance from the various distortions with which it is currently plagued before trying ambitious new programs.

Nobel Prize Winners

From the WSJ:

Americans Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson won the Nobel prize in economics on Monday for developing a theory that helps explain how incentives and private information affect the functioning of markets.

For those who want it, here is more information about the men and their work:

UPDATE: Differing perspectives from our friends in the Austrian school: