Monthly Archives: October 2007

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.


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:

Free Trade Lives

Jagdish Bhagwati has written an excellent essay for the Financial Times in regards to economists and free trade:

Turn to the leading US newspapers these days and you will read about the “loss of nerve”, even “loss of faith”, in free trade by economists. Many write about free trade in funereal overtones. Yet all this hype reminds me of the cartoon where two dervishes are idly sitting on the desert sands, next to their camels, and one is reading the Cairo news paper, Al-Ahram, and telling the other: “It says that we are in ferment again.” The truth of the matter is that free trade is alive and well among economists.

This is best seen in historical perspective. Such media stories about the economists’ disappearing consensus on free trade have been recurrently written in the past 20 years. There have been three episodes in recent years when false notes of alarm were sounded over free trade.

Read the whole thing.

Quote of the Day

“There are no doubt some things available to the modern workman that Louis XIV himself would have been delighted to have—modern dentistry for instance. On the whole, however, a budget on that level had little that really mattered to gain from capitalist achievement. Even speed of traveling may be assumed to have been a minor consideration for so very dignified a gentleman. Electric lighting is no great boon to anyone who has enough money to buy a sufficient number of candles and to pay servants to attend them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.”

— Joseph Schumpeter, Capitalism, Socialism, and Democracy

HT: Russ Roberts

The Republican Debate

Russ Roberts was a live-blogger for the NYT last night for the Republican debate. The debate was mediocre at best, but Roberts commentary is stellar. My favorite comment:

The Constitution! I’ve seen it under glass here in D.C. at the National Archives and dream of the day when American presidents and our elected representatives actually believe that it’s something to honor rather than something to circumvent for the “public interest.” So we’re up to two mentions of the Constitution to limit the power of the President. Don’t know the record for a presidential debate. We must be close.

This was supposed to be a debate about economic policy, but it was largely filled with rhetoric and doublespeak. I look forward to the same thing from Democrats when they have the same forum at the end of the month.

An Interesting Paradox

Our friend James D. Miller writes:

Various government agencies come after the ex-cons to collect the debt. As a result, if the ex-cons get legitimate jobs they must give much of their salary to the government. This, as the New York Times writes, makes the ex-cons “less likely to seek regular employment.”

So, according to the liberal New York Times editorial board, if you know the government is going to take much of your salary you are less likely to get a job. I wonder if the Times has considered how the economic logic of this editorial could be applied to tax policy.

Creative Destruction

During a recent EconTalk podcast, Don Boudreaux mentioned that it is very likely that companies like Wal-Mart and Microsoft will someday go bankrupt and the media will mourn these once derided companies. His comment was part of a larger discussion regarding Schumpeter’s idea of “creative destruction“, however, it highlights a common bias against firms with market power and few visible competitors. This analysis ignores the role of the entrepreneurs and innovators that create new products that directly compete with the behemoths. Markets are not static, but rather dynamic. Thus we cannot simply judge competition by one moment in time.

In this light, I found it a bit surprising how prescient Boudreaux’s comments were when the Wall Street Journal ran a story this week mourning the end of the Wal-Mart era:

The Wal-Mart Era, the retailer’s time of overwhelming business and social influence in America, is drawing to a close.

Using a combination of low prices and relentless expansion, Wal-Mart Stores Inc. emerged from rural Arkansas in the 1970s to reshape the world’s largest economy. Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company. His company helped boost America’s overall productivity, lowered the inflation rate, and strengthened the buying power for millions of people. Over time, it also accelerated the drive to manufacture products in Asia, drove countless small shops out of business, and sped the decline of Main Street. Those changes are permanent.

Today, though, Wal-Mart’s influence over the retail universe is slipping. In fact, the industry’s titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions to $4. But success is no longer guaranteed.

Similarly, a WSJ blog featured a post about why Wal-Mart really wasn’t bad for small businesses after all.

It is easy in hindsight to see that a particular large company’s influence was not as burdensome as perceived. Perhaps the animosity toward powerful companies is an example of what Bryan Caplan calls pessimistic bias given the fact that uncertainty lies in the future. In any case, I find it disturbing (yet not surprising) that attention is often focused much more on the destruction rather than on the creativity.

Quote of the Day

“Generally, these ethical views are clothed in the “scientific” opinion that, in these cases, free-market action is no longer optimal, but should be brought back into optimality by corrective State action. Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.”

— Murray Rothbard, Man, Economy, and State